Why Does The Federal Government Make Grants-In-Aid To The States

Why does the federal government make grants-in-aid to the states? A federal grant is a form of financial aid provided to support a particular project or program. These grants are available to support various entities, including state and local governments, municipalities, and individuals. Typically, the government used income tax revenues to fund the federal grants.

Unlike loans, recipients of federal grants have no obligation to repay the funds. However, it’s essential to follow the specific guidelines set by the federal government for the proper use of the grant money. Grants are available to serve specific purposes and achieve particular objectives outlined by the government.

So, why does the federal government make grants-in-aid to the states? A federal grant in aid enables the government to financially support a project while maintaining its independence from state control. These funds come with specific standards and requirements.

Granting organizations may allocate the resources over one or more periods each year. Also, they often distribute the funds among potential recipients. As a result, securing such grant funding can be a competitive process, with multiple applicants vying for the available funds. The U.S. government awards approximately $500 billion annually in Federal Assistance Agreements, primarily in the form of grants.


The Historical Context of Federal Grants-in-Aid

Federal grant programs to the states have experienced significant growth since the implementation of President Lyndon B. Johnson’s Great Society initiatives. In fiscal year (FY) 1960, these grants amounted to $7 billion. This is more than tripled to $24 billion by FY 1970. Over the subsequent 49 years, from FY 1970 to FY 2019, they expanded by over 300 percent, reaching $750 billion.

Notably, the funding provided through the American Rescue Plan Act (ARPA) alone, totaling $350 billion. This funding exceeds the entire amount allocated for federal grants to the states in FY 2019 by 47 percent.

Why does the federal government make grants-in-aid to the states? Federal grants offer states financial support. Besides, it comes with increased federal government oversight, rules, and regulations. These grants enable states to boost spending in areas aligned with the priorities of the party in power in Washington, D.C., allowing them to expand their budgets without immediate fiscal concerns.

However, once federal funds are exhausted, states must bear the full cost of these programs, which can be challenging to reduce or eliminate once they are established. Moreover, federal programs can sometimes overshadow more pressing state priorities, potentially leading to tax increases to cover the expenses associated with these initiatives.

Three Types of Federal Government Grants

Here are the types of federal government grants-in-aid to the states:

1. Categorical Grants

These grants are the most restrictive and are further categorized into four subtypes. Project Categorical Grants provide funds for specific projects with strict spending requirements, distributed through an application process. There is also Formula Categorical Grants, where recipients will get the funds according to a predetermined formula established by legislation or agency guidelines.

Formula-Project Categorical Grants combine elements of both project and formula grants, using a formula to determine funding for specific projects with strict conditions. The last type is Open-End Reimbursement Categorical Grants that reimburse a specified proportion of recipient program costs. This eliminates the competition among recipients but provides limited flexibility in funding.

2.Block Grants

These grants strike a balance between the strictness of categorical grants and the flexibility of general revenue sharing grants. They provide a fixed amount of funds to states for broad purposes such as community development, social services, public health, or law enforcement. States have more latitude in spending as long as it aligns with the established subject area.

3.General Revenue Sharing Grants

These grants offer the most flexibility to state and local governments. They were part of President Richard Nixon’s grant system reforms and were in place from 1972 to 1986. General revenue sharing grants provided a fixed amount of funds determined by formula to states. This allows for expansive use with less federal government oversight compared to categorical and block grants.

Each type of federal grant serves different purposes and comes with varying levels of federal control and accountability. The choice of grant type can impact how funds are allocated and spent in various programs and projects.

How And Why Does Federal Government Make Grants-In-Aid To The States

Why does the federal government make grants-in-aid to the states? The federal government allocates grants to states and localities for a wide range of purposes, with a significant portion dedicated to healthcare initiatives.

While some grants are tightly restricted to specific purposes, block grants offer recipients more flexibility in how they achieve program objectives. This diversity in grant types allows the federal government to address various needs and priorities across different states and local communities.

The Allocation of the Funds

In fiscal year 2019, the federal government distributed approximately $721 billion to states and localities, which accounted for around 16 percent of its budget. These funds constituted about one-quarter of the total revenues for state and local governments. The allocation of these funds was distributed as follows:

  • Approximately 61 percent was for the healthcare services.
  • About 16 percent was for security programs.
  • Roughly 9 percent went towards transportation.
  • Another 9 percent was for education, training, employment, and social services.

These distributions reflect the federal government’s substantial financial support for various programs and services at the state and local levels, with a significant emphasis on healthcare funding.

The federal government provides grants to state and local governments for various reasons. State and local governments often have better insights into local preferences, needs, and cost structures. Devolving or sharing responsibility for certain services or functions with them can lead to more efficient and tailored outcomes.

The federal government may use grants to encourage states and localities to undertake additional spending that benefits not only their jurisdictions but also neighboring areas or the entire country.

Over the past five decades, the composition of federal grants has seen significant changes. For instance, federal grants dedicated to healthcare programs made up less than 20 percent of the total until the 1980s. This shift reflects evolving priorities and federal-state partnerships in various policy areas.

How Government Achieve National Policy Objectives through Grants-in-Aid

Why does the federal government make grants-in-aid to the states? The federal government allocates funding for a wide range of programs, services, and projects, recognizing that some of these initiatives can be more effectively managed at lower levels of government where officials have a better understanding of local needs.

For example, Title I Education Grants provide funding to local education agencies to support children from low-income families in meeting state education standards. Local officials can use these funds to design and implement programs tailored to the specific needs of their community, such as additional reading instruction or after-school and summer programs.

There is also Safe Streets and Roads for All (SS4A) Program, established through the Bipartisan Infrastructure Law in 2021. This program received $5 billion in funding over five years. SS4A aims to improve the country’s highways, roads, and streets to eliminate roadway fatalities in the long term.

Since many roadways fall under the purview of regional and local authorities, the federal government incentivizes them to undertake infrastructure projects aligned with the Department of Transportation’s National Roadway Safety Strategy. This approach allows federal support for projects that align with national priorities while leveraging local expertise.

These examples highlight how federal grants can empower local officials. So, they can address specific community needs and promote national objectives where the federal government collaborates with lower levels of government to achieve common goals.

Problems and Challenges of Federal Grant-in-Aid to States

The expansion of federal grants to the states and the transition from the Constitution’s framework of divided powers to a system of coercive federalism have raised several concerns and had negative consequences for the states. Federal grant programs not only undermine the division of powers between the states and the federal government, as established by the Constitution, but they also contribute to wasteful practices and unsustainable spending.

The primary issue with federal grants lies in their impact on the federalist system. Historical developments such as Roosevelt’s New Deal and Johnson’s Great Society marked the shift from cooperative to coercive federalism. The expansion of federal grants has reshaped American intergovernmental relations, moving away from James Madison’s vision of how power should be shared between the federal government and the states.

This expansion of federal authority allows for greater central control. Therefore, it weakens the safeguards provided by a decentralized system and reduces the ability of states and localities to make decisions that best suit their unique circumstances.

Restrictive grants to the states enable the federal government to establish and enforce policy priorities that can vary significantly from one administration to another. This creates inconsistency and contradiction. In 1987, the Supreme Court ruled that Congress had the authority to attach conditions related to “federal interests in particular national projects or programs” to federal funds to implement preferred policies. This approach has been increasingly expanded by Congress and federal agencies in recent years. Here are the examples of problems related to federal grant-in-aid with the states:

1. ReConnect Loan and Grant

Let us consider the U.S. Department of Agriculture’s ReConnect Loan and Grant broadband expansion program. Its evaluation criteria give preference to applicants who commit to “net neutrality” principles, a policy priority of the Biden administration. However, this policy was also in place during the Obama administration. After that, the Federal Communications Commission (FCC) eliminated it during the Trump administration.

2. Guidelines of ARPA

Another example is the guidelines for spending under the American Rescue Plan Act (ARPA). This initially stipulated that state and local governments could not use any of those funds to reduce taxes. These instances illustrate how restrictive grants can fund specific policy agendas. This may change each new administration, create a lack of consistency and predictability in federal-state relationships.

3. Coercive Grants

Coercive grants, with their impact on state sovereignty, give rise to additional issues, particularly in terms of transparency and accountability. As grant money flows further from the issuing federal agency, it becomes increasingly challenging to track the allocation of the fund.

Justice Sandra Day O’Connor, in the case of New York v. United States, pointed out that when the federal government compels states to regulate, it diminishes the accountability of both state and federal officials. This problem is exacerbated by the absence of a standardized reporting framework for states and federal agencies.

4. CDBG-DR Program

The Community Development Block Grant-Disaster Recovery (CDBG-DR) program, established in 1993. The goal is to provide long-term recovery assistance to areas affected by natural disasters. But, it has faced issues such as funding delays and wasteful spending.

According to a January 2021 Urban Institute report, CDBG-DR grants took an average of 4.7 years to complete. A May 2021 Government Accountability Office (GAO) report found that the frequent transfer of funds through various entities before reaching the intended recipients. This made the program susceptible to misuse and inefficiency. These examples illustrate the challenges associated with the transparency and accountability of grant programs that span multiple levels of government.

The Department of Housing and Urban Development has distributed a significant amount of funds. It was $40 billion, to states and localities in response to disasters since 2017. This accounts for nearly half of the $90 billion disbursed since the inception of the CDBG-DR program. The CDBG-DR provide states with the ability to offload costs and responsibilities to the federal government. This reliance on federal disaster relief programs can result in states located inland having to allocate additional funds to assist coastal states, which are typically the hardest-hit by natural disasters.

As states become more dependent on federal funding and shift their own spending priorities, it can lead to inequitable distribution of resources. Citizens in some states effectively subsidizing disaster relief efforts in others. Moreover, the reliance on federal funds can foster a sense of dependency. Even, this can create opportunities for waste, fraud, and abuse within government programs.

When states receive substantial amounts of federal money, the potential for individuals to exploit these funds significantly increases. This underscores the importance of ensuring responsible and accountable use of federal grants at the state level to prevent misuse and safeguard taxpayer dollars.

5. ARRA Funds for Covid

When federal grant funds eventually run out, states must find the alternative sources of funding to replace the lost federal dollars. They may have to increase revenue or eliminate programs to compensate for the loss. For example, after the passage of the American Recovery and Reinvestment Act (ARRA) in 2009, many states used federal grant funds to establish new programs. Or, they use the grants to sustain existing ones that would typically face budget cuts. However, once the federal funds expired within a few years, states found themselves unable to continue these programs.

A May 11, 2020, report by the Reason Foundation examined the utilization of federal education funds received under ARRA, particularly for aid during the early stages of the COVID-19 pandemic. The report revealed that several states spent federal education funding on projects unrelated to the legislation’s intended purpose.

For example, Texas directed its education funds into a fund that primarily benefited higher-income school districts, which were less impacted by the Great Recession compared to low-income areas. North Carolina allocated money through mechanisms that did not align directly with overall student counts or needs.

This means there is an allocation of federal funding for programs like professional development, driver training for ninth-graders, and gifted and talented education. This demonstrates that strict regulation of federal funds can increase federal control over states and risk infringing on state sovereignty.

6. ARPA Funds

The allocation of the first tranche of American Rescue Plan Act (ARPA) grants revealed several instances of wasteful projects. Those activities were not related to economic recovery. One notable example involved the Whitewater Independent School District (ISD) in Wisconsin. The school board voted to allocate 80 percent of its ARPA funds to the construction of synthetic turf fields for baseball, softball, and football. The decision was made despite the district having the rare opportunity to enhance its facilities, as it would not typically go through a referendum process for turf fields.

When presented with federal relief funds, state and local governments sometimes choose to use them to expand existing programs or establish new ones without thoroughly assessing their long-term impact. This underscores the need for responsible and thoughtful allocation of federal relief funds to ensure that they address the most pressing needs and deliver meaningful benefits to communities.

In the end of the day, the federal grant system’s various impacts and consequences highlight the urgent need for significant reform. Without substantial changes, the problematic effects of federal grants on states will continue to grow.

The Build Back Better Act passed the House of Representatives on November 19, 2021. Besides, it awaits a vote in the Senate and exacerbates these concerns. The legislation includes requirements for states to prioritize programs that “expand equitable outdoor access” for “underserved groups” on non-Federal land, among other conditions. These provisions allow the federal government to impose policies on states. Also, to enable coercive federalism.

This expansion of federal power undermines state authority and autonomy. Also, this makes states complicit in the waste, fraud, and abuse that often plague federal grant programs. Reform is essential to address these issues and ensure that states can make independent decisions that best serve their constituents.

Federal Grants-In-Aid To The States Need Reformation

Federal grant reforms require a bottom-up approach, as expecting Congress and federal agencies to willingly relinquish their power is unrealistic. A state-based approach enables a localized response to problems and allows states to reestablish their proper role in the federalist system. Here are some steps states can take to reform the federal grant system:

1. Decline Federal Funds When Costs Outweigh Benefits

States should refuse federal funds when the costs outweigh the benefits or when policy requirements make effective spending impossible. Some states have previously turned down federal funds for this reason, and such fiscal responsibility should serve as a model for others.

2. Reclaim Sole Authority Over State Matters

States should reestablish their sole authority over activities that occur exclusively within their borders, particularly in areas like education. This will reduce federal intrusion into state issues and promote more efficient governance.

3. Prepare for Future Economic Downturns

States should prioritize building rainy day or emergency funds to prepare for future economic crises. By setting aside surpluses generated during times of prosperity, states can reduce their reliance on federal assistance during hard times.

Implementing these reforms will help states stabilize their finances, reduce their dependence on federal assistance, and avoid repeating historical patterns of federal expansion during economic crises. It’s essential for states to learn from past experiences and take control of their own destinies.


Why does the federal government make grants-in-aid to the states? The federal government’s practice of making grants-in-aid to states serves several crucial purposes in the American federal system.

Firstly, it allows for the efficient redistribution of resources to address national priorities and respond to crises such as natural disasters or economic recessions. By providing states with financial assistance, the federal government can ensure that essential services are delivered, regardless of disparities in state resources or capacity.

Secondly, federal grants empower state and local governments to address local needs and tailor programs to their communities while aligning with federal policy objectives. This flexibility enables state and local officials, who are often more attuned to their constituents’ preferences, to implement policies that best serve their unique circumstances.

However, the practice of federal grants-in-aid also presents challenges. For example, the risk of federal overreach, increased dependency on federal funding, and the potential for inefficiencies and waste. Striking a balance between federal oversight and state autonomy remains a complex task.

Nevertheless, federal grants continue to play a pivotal role in the intergovernmental relationship in the United States. It facilities cooperation between levels of government and contributes to the functioning of essential programs and services. In short, why does the federal government make grants-in-aid to the states to give benefit the citizens in the nationwide.


What are federal grants-in-aid to the states?

Federal grants-in-aid to the states are financial assistance programs through which the federal government provides funding to state and local governments for various purposes, such as public education, healthcare, infrastructure, and social services. These grants are intended to support state and local efforts in addressing specific national priorities or needs.

Why does the federal government make grants-in-aid to the states?

The federal government makes grants-in-aid to the states for several reasons. Firstly, it allows for the equitable distribution of resources to address national priorities, such as healthcare, education, and disaster recovery. Secondly, it enables state and local governments to tailor programs to their unique needs while aligning with federal policy objectives. Additionally, federal grants promote cooperation between levels of government and ensure essential services are delivered consistently across the country.

What types of programs are funded through federal grants-in-aid to states?

Federal grants support a wide range of programs, including education, healthcare, transportation, environmental conservation, law enforcement, and social services. These programs may target specific populations, such as low-income families, veterans, or individuals affected by natural disasters.

How do states access federal grants-in-aid?

States typically apply for federal grants by submitting proposals or applications to the relevant federal agencies. These proposals outline the program’s goals, objectives, and budgetary requirements. Federal agencies review and approve grant applications based on their alignment with federal priorities and compliance with regulations.

What are some challenges associated with federal grants-in-aid to states?

Challenges include the potential for federal overreach, increased state dependency on federal funding, and the risk of inefficiencies and waste. Striking a balance between federal oversight and state autonomy remains a complex task in the grant process.

Can states refuse federal grant funding?

Yes, states have the option to decline federal grant funding if they believe the costs outweigh the benefits or if the program’s requirements are not in their best interest. This decision may be based on factors such as policy compatibility and the administrative burden associated with the grant.

Are there any recent developments in federal grants to states?

Recent developments include increased grant funding in response to crises like the COVID-19 pandemic and changes in federal priorities with new legislation, such as the American Rescue Plan Act. These developments continue to shape the landscape of federal grants-in-aid to states.