Fiscal Federalism

Select a city or county in the state of South Carolina to research and study the current fiscal year budget. Determine the various proportions of revenue that the federal, state, and local government(s) contribute to the budget. In a Microsoft Word document, write a 1 page summary arguing “Whether” as well as “How” the selected city or county would benefit from a change in how it is funded? What specific changes would you propose in funding sources and what specific changes in spending would you propose concerning policies and programs?


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Fiscal federalism involves the pattern of spending, taxing, and providing grants in the federal system. Grants-in-aid are the main instrument the national government uses to both aid and influence states and localities. Federal aid amounted to about $484 billion in 2010. Categorical grants can be used only for specific purposes (or categories) of state and local spending. State and local agencies can obtain categorical grants only by meeting certain qualifications and by applying for the grants. Much federal regulation is accomplished by “strings” that are attached to categorical grants, such as nondiscrimination provisions. The most common type of categorical grant is a project grant, awarded on the basis of competitive applications. Formula grants are distributed according to a formula based on factors such as population, per capita income, and percentage of rural population.

Complaints about the cumbersome paperwork and numerous federal requirements attached to categorical grants led to the adoption of block grants. Congress implemented block grants to support broad programs in areas such as community development and social services. Block grants provide more flexibility since states and communities have discretion in deciding how to spend the money. The percentage of federal aid to state and local governments in the form of block grants began increasing in 1995 as the new Republican majority in Congress passed more federal aid in the form of block grants, including grants for welfare programs.

In recent years states have been burdened by underfunded mandates and unfunded mandates. These require states to spend money to comply with a law of Congress (or, in some cases, a federal court order).

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