Revenue with Strings Attached?

Ready for a long one? Last week, we promised to begin a review how and why American federalism has changed since the framer’s time. One of the big changes has to do with revenue-sharing. A brief introduction to federal revenue-sharing follows. We will review changes a few weeks from now. Stay with us!

There are four main ways that the federal government has shared revenues with the states.[1]

  • General revenue sharing is a way to send money to the states without any strings attached.  General revenue sharing grants are distributed by formulas, have few restrictions on the purposes for which the funding may be spent, and have the least administrative conditions of any federal grant type. 
  • Categorical grants are the opposite; they are tightly controlled. Most categorical grants can be used only for a specifically aided program, usually are limited to narrowly defined activities, and have more administrative and policy conditions than other grant types. Most are distributed in accord with pre-defined formulas, although some are awarded on the basis of a competitive application process. For instance, Medicaid, a categorical grant that accounts for more than 65 percent of all federal aid, is distributed by a formula.
  • Block grants represent a compromise between general and categorical grants. Block grants address broad purposes, are distributed by formulas, allow greater flexibility in the use of the funds, and have fewer administration conditions than categorical grants. In practice, block grants often combine previously existing categorical grants within a particular policy area.
  • The federal government shares revenues from natural resource exploitation on federal lands with states and counties that host those federal lands.[2] For example, as noted by the Office of Natural Resource Revenue, “Companies pay to produce energy and minerals on federal lands, Native American lands, and the Outer Continental Shelf. The payments these companies make include bonuses, rents, and royalties. The Office of Natural Resources Revenue (ONRR) collects these payments and distributes them. The payments go to federal and local governments and Native Americans.”
    • Note: The federal government also transfers some federal lands to the states via land grants. Most of the land grants occurred in the 19th century.  Roughly 328 million acres were transferred to the states.[3]  Under the Federal Land Policy and Management Act of 1976 (FLPMA) that Congress expressly declared that the remaining public domain lands generally would remain in federal ownership.

In our nation’s earliest years, grants appeared simply because various states had specific needs. For example, in 1803, Congress waived tariff obligations for the residents of Portsmouth, NH, after a massive fire there.[4]  The first cash grants-in-aid appeared in 1887.  Many categorical grants followed, with the degree of federal oversight and conditionality increasing over time.  The first block grant was created in 1966 by grouping together nine categorical grants as mandated by the Partnership for Public Health Act.[5] The first and only general revenue sharing program began in 1972 and ended in 1986.[6]

Want to read more? Click here for access to the full course. We are in Part 3 of 4 now.

Image: Money with strings attached.

[1] Congressional Research Service (2019a). Federal grants to state and local governments: A historical perspective on contemporary issues. R40638, and Congressional Research Service (2020). Block Grants: Perspectives and Controversies. R40486.

[2] See pages 10-12 of Congressional Research Service (2021). Federal Lands and Related Resources: Overview and Selected Issues for the 117thCongress. R43429.

[3] See p. 2 of Congressional Research Service (2020). Federal Land Ownership: Overview and Data. R42346.

[4] Kincaid, 2017, p. 1065.

[5] Congressional Research Service (2020). Block Grants: Perspectives and Controversies. R40486.
     See footnote 1 on page 1.

[6] See Congressional Research Service (2009). General Revenue Sharing: Background and Analysis. RL31936.  See also

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