Source: U.S. Census Bureau, StatisticalAbstract of the United States, Selected Years.
C. The System Of IntergovernmentalTransfers In The United States
In this section, we describe the system ofintergovernmental arrangements in the United States and how they have evolvedover time. We begin with a discussion of the types of intergovernmentalarrangements that exist between the federal and the state/local governments.Next, we discuss the need for intergovernmental transfers. Lastly, we describethe programs directed towards correcting vertical and horizontal fiscalimbalances.
Prior to the Great Depression, federalintergovernmental transfers represented only a small fraction of revenues ofstate and local governments. The 1930s and again in the 1960s and 1970switnessed a substantial increase in federal intergovernmental transfers. Forexample, in 1929, federal transfers comprised only 1.3% of state and localgovernment revenues, whereas in 1997, they comprised 20% of state revenues and3% of local government revenues. As well, intergovernmental transfers fromstate to local governments represented approximately 35% of local governmentrevenues in 1997.
As was discussed in Section B,revenue-raising in the United States is relatively centralized, although stateshave considerable taxing ability. At the same time, most services are providedby state and local governments. This asymmetry between revenues andexpenditures at the state/local level means that the federal government todayplays a significant role in financing and influencing the provision of servicesat the state and local levels of government. The areas affected by most federalgrants-in-aid are those traditionally reserved for the states as part of theirresidual powers in the United States Constitution.28 However, the delegatedpowers of the Congress have been interpreted over the years in a way thatallows the federal government very few restrictions on the use of its spendingpower.
The states, in turn, play a significant rolein the financing and influence of the provision of services at the local level.Given that local government powers are granted by the state governments, thereis no common system of local government in the United States and the amount ofstate financial aid to local governments varies considerably among states. Somestates allow local governments considerable discretion in the financing andprovision of services while others tightly control the activities of localgovernments. Given the limited revenue-raising ability of local governments,however, intergovernmental transfers from the federal to local governments andfrom state to local governments comprise a significant proportion of localrevenues.
We now describe the different forms in whichintergovernmental arrangements take in the United States.
Types ofFederal-State/Local Fiscal Arrangements
1. Categorical Grants
The categorical grant is the most popularform of federal financial assistance to subnational governments. Categoricalgrants provide funds for specific programs. Use of these types of grants allowsthe federal government to influence and increase the provision of services atthe state and local levels. Categorical grants also provide incentives forsubnational governments to implement projects and programs that adhere tonational goals. Most categorical grants in the United States requiresubnational governments to match a portion of the federal funding.
There are two types of categorical grants:formula grants and project grants. The distribution of a formula grant is basedon a formula containing factors such as population and per capita income. Thesegrants thus contain an equalizing component. Project grants, on the other hand,are distributed at the discretion of federal administrators.
Categorical grants provide financing fornumerous projects and programs. The more important funding areas are describedbelow. Table C1 provides data on federal aid to state and local governments forselected years from 1970 to 1998.
(a) Health Care29
The largest intergovernmental assistanceprogram is Medicaid. Medicaid was created in 1965 and provides health care tothe poor, aged in nursing homes, blind, and disabled. It is administered by thestates and they have considerable discretion over eligibility standards. Thefederal government does, however, stipulate a minimum level of benefits. Thefederal government provides 20-50% of the financing of benefits and 50% of thefinancing of administrative costs. Expenditures for Medicaid have increasedsignificantly in recent years and are expected to continue increasing into thefuture.
Table C1: Federal Aid to State and LocalGovernments, Percentage of Federal Aid, Selected Years
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