I took the egr valve off today, and found lots of carbon in one side of the valve, and on the other there was lots of either oil or varnished gas, which makes it look like it hasnt worked in quite some time. It passed smog a while back, but I dont think It has worked since I owned the car. I cleaned it out, and put it back on, but I still dont know if it works. Is there any way to know if it is working?

when motor is cold start it up, you can feel if its moving and helping keep your motor running.  pull the vac line that comes off of the EGR and see if theres alittle suction.  I just cleaned mine out, and it works really well now.

when motor is cold start it up, you can feel if its moving and helping keep your motor running.  pull the vac line that comes off of the EGR and see if theres alittle suction.  I just cleaned mine out, and it works really well now.

According to the FSM:

Under any of the following conditions, ECM closes the vacuum passage of VSV. In this state, as the vacuum is not transmitted to the EGR valve it remains closed.

When engine cooling temperature is low
When barometric pressure is low (high altitude)
When engine is running at high load
When engine speed is low

You might want to check your VSV.

Is there a downside to the EGR not working?

I get a check engine light when I hook up the egr modulator but if I bypass it with a little rubber hose it goes away.

My mileage is 17 to 20 mpg at the moment so that seems average with the 31" tires

EGR is a simple system to lower combustion temp. This lowers your emissions. To test is easy on most veh's. by checking it at normal engine operation temp. remove the vac. line to the EGR valve & connect vac. pump to the valve via a new vac line & apply vac. The engine will stall or start to run very rough do to the exh. comming into the intake manifold. EGR's only work at higher rpm for this reason. As for your light comming on. It should only come on when you "dissconnect" the vac. line. Most EGR's have a temp sensor to let the comp. know it's working. Exh. is hot & the EGR valve will get hot if it's working. By dissconecting the EGR it won't get hot & on comes the light. No problem driving it dissconnect as long as the veh's computer doesn't make the system go rich or lean to compensate. Hope this helps.

Is there a downside to the EGR not working?

If its shut then it shouldn't be much of an issue. I believe that the ignition runs a bit more advance than it would do without the EGR, I haven't yet confirmed that. As long as your fuel is a high enough octane rating then you won't notice. If its marginal then you could get a little pinking.