Fiscal federalism refers to the use of grants-in-aid (federal funds allocated to state and local governments) to encourage policies at the state and local levels. Grants-in-aid have long been used to influence state actions. The first federal grants-in-aid in the U.S. were during the Articles of Confederation. The use of grants-in-aid as a mechanism to influence states and local governments expanded as we shifted towards cooperative federalism during the 20th century. Today, many contemporary facets of federalism involve questions on money and control.
Different types of grants-in-aid have different levels of conditions on aid, which require states to spend grant money in certain ways if they wish to receive federal funding.
|Type of Grant-in-Aid||Description||Conditions-on-Aid?|
|Categorical Grants||Federal aid to states and localities clearly specifying what the money can be used for||Yes; high (less state discretion)|
|Block Grants||Federal grants to states to be used for general conditions||Yes; low (more state discretion)|
|General Revenue Sharing||Federal aid to states without any conditions on how the money is to be spent||No (full state discretion)|
Administrative federalism refers to the process whereby the national government sets policy guidelines and then expects state governments to pay for the programs they engender without the use of grants-in-aid.
One of the main tools the federal government uses when engaging in administrative federalism is the unfunded mandate, which imposes federal requirements on state and local governments without providing any monetary aid to meet those requirements. The federal government can also withhold federal monies (such as reducing the amount of money given to a state through general revenue sharing) to encourage states to adopt certain policies.