Social scientists have given substantial attention to poverty across U.S. localities. However, most work views localities through the lens of population aggregates, not as units of government. Few poverty researchers question whether governments of poorer localities have the capacity to engage in economic development and service activities that might improve community well-being. This issue is increasingly important as responsibilities for growth and redistribution are decentralized to local governments that vary dramatically in resources. Do poorer communities have less activist local governments? Are they more likely to be engaged in a race to the bottom, focusing on business attraction activities but neglecting services for families and working people? We bring together two distinct literatures, critical research on decentralization and research on local development efforts, that provide contrasting views about the penalty of poverty. Data are from a unique, national survey of county governments measuring activity across two time points. The most consistent determinants of activity are local government capacity, devolutionary pressures, and inertia or past use of strategies. Net of these factors, levels and changes in poverty do not significantly impact government activity. There is no evidence the nations' poorest counties are racing to the bottom. Findings challenge views that poverty is a systematic structural barrier to pursuing innovative economic development policies and suggest that even poorer communities can take steps to build local capacity, resources, and networks that expand programs for local businesses and low-wage people. Copyright (c) 2009 Wiley Periodicals, Inc..