Fiscal Federalism

Each year, the national government sends to the states approximately $250 billion to fund a variety of programs. While the transfer of the funds is not controversial, the conditions on which states may use the money are. In many cases, the Congress will send money for narrowly defined purposes which leave the states little or no discretion about how to use the money. These kinds of transfers are called categorical grants. States and local governments prefer block grants, which are sums of money transferred to the states for broader purposes, e.g., education or law enforcement, with little or no explicit requirements about how to use the money for those purposes.

From 1972 to 1996, state and local governments received billions of dollars in no-strings-attached money from the national government under a program called “general revenue sharing.” While some states would probably prefer a return to such a program, the Congress would probably be reluctant to give money to the states so freely. Congress frequently uses the money it sends to the states to “encourage” the states to do what it wants. For example, to receive federal highway dollars, a state must set its minimum drinking age at no lower than twenty-one years.

Devolution

One of the more important trends in federalism today is the transfer of administrative control over programs from the national to state and local governments. This process is often called “devolution.” While states often argue that they can do a better job administering programs than the national government, there can be significant trade-offs when converting a national program into fifty separate state programs. The danger for states is that the national government will shift the responsibility for a program to the states without giving them the necessary resources to run it. This would be a particularly costly kind of unfunded mandate.

From a national perspective, the greatest potential problem posed by devolution is that there will be large disparities in the programs each state offers. Many fear that if states are given the responsibility for some programs without any minimal requirements, there will be a “race to the bottom” as states slash their budgets for those programs in favor of spending on other items in their budgets. The most cynical version of this argument suggests that states will reduce welfare benefits to encourage poor people to move out of their states to states that have higher welfare benefits.

While the potential problems of devolution are significant, the transfer of administrative responsibility for welfare programs from the national level to the states is largely seen as a successful example of what can happen when government responsibilities and functions are “devolved” to the local level. Congress passed along to the states virtually all of the money it had spent on welfare in the past and the states have, through effective management and creative policy making, cut welfare roles and helped people move from welfare to work. If state-managed welfare programs are successful in the long run, support for more devolution is likely to grow.