Sociologists have long recognized uneven development within nations and differential patterns of poverty and prosperity across places. In analyzing why some places fare better than others, researchers largely focus on market forces. Few studies have considered the role of the local state. Yet in many countries today local governments have gained responsibilities and control as national governments offload responsibilities. This shift toward localized government is often associated with neoliberalism. The conventional view is pessimistic about local governments, stressing their potential to reinforce poverty and inequality. Our research challenges this view. We advance a counter-perspective that builds from two subnational literatures, one on poverty and place and the other, mesocomparative research on the state. Focusing on the United States, we examine whether local governments are linked to poverty and income inequality. Using unique data that span all communities (over 3,000 county areas) over the Great Recession, we show that the institutional capacity and spending policy of local governments at the outset of the recession influenced how communities fared subsequently. To our knowledge, this is the first sociological study that integrates theoretical understanding of local state processes and research aimed at explaining poverty and inequality across the United States.