Federal Subsidies to the States

Report Outline
Theories of Federal Aid
Evolution of the Federal-Aid System
Cost of the Federal-Aid System
Federal-Aid Measures in Congress
Proposed Extensions of System
The Opposition to Federal Aid
The Case for Federal Aid
Special Focus

Theories of Federal Aid

Several factors are now directing public attention to the American subsidy system. Chief among them are the rapid growth of federal aid to the states in recent years, the method of apportioning such grants and the conditions attached to the federal payments, the new forms being taken by federal aid, and the extension of federal functions involved in the growth of the system. Current efforts to relieve economic distress have led to the introduction at the present session of Congress of various measures to extend or modify the federal-aid system. Unofficial proposals looking to changes in the system are also being advanced by interested groups and individuals. Prominent among these is the proposal to relieve the states, at least temporarily, of any obligation to match payments offered by the federal government and to have Congress make outright grants to the states. It is also suggested that the federal government reimburse the states and municipalities for expenditures they have made and are making to mitigate unemployment. These developments and proposals have renewed the old debate as to the merits of the principles involved in federal aid, in the course of which widely divergent views are being expressed.

In the light of current proposals for extension of the subsidy system. this report will review the principles upon which federal aid is based, the evolution of the system in the United States, the cost of the system to the central government, the official and unofficial proposals now being put forward, and the arguments for and against the system.

Theories of Federal Aid

The problem involved in federal subsidies to the states is that of financing locally administered services—such as forest-fire prevention, agricultural extension work, highway construction, vocational education, and promotion of the welfare of mothers and infants—which are national in scope and significance. There are at least three ways in which such essential service? could, in theory, be financially supported: (1) by the states alone, (2) by the federal government alone, or (3) jointly by the states and the federal government.