Money plays a key role in the federal government’s relationship with the states. Congress gives money to the states, for example, but stipulates how this money should be used in order to force the states to cooperate with federal policies.

Federal Aid to the States

Since World War II, states have come to rely heavily on federal money. Likewise, the national government has also relied on the states to administer some federal policies, a practice called fiscal federalism. The term grants-in-aid refers to the federal government giving money to the states for a particular purpose. There are two general types of grants-in-aid:

  1. Block grants: Money given for a fairly broad purpose with few strings attached.
  2. Categorical grants: Money given for a specific purpose that comes with restrictions concerning how the money should be spent. There are two types of categorical grants:
  • Project grants: Money states apply for by submitting specific project proposals
  • Formula grants: Money given to states according to a mathematical formula

Example: When the Republicans retook Congress in 1994, they changed many federal grants into block grants. Instead of giving money to states to buy textbooks or repair schools, for example, Congress gave states blocks of money to spend on education in any way the states saw fit.

Federal Pressure on the States

The federal government uses a number of tactics to compel states to follow its policies and guidelines. Congress can order states to comply but usually applies pressure more subtly by threatening to withhold funds from disobedient states.

Example: When the federal government decided to raise the drinking age to twenty-one, it denied certain highway funds to states that opted not to comply.


Sometimes the federal government orders states to do certain things, such as obeying housing laws or environmental regulations. These demands are called mandates. An unfunded mandate is one for which the federal government provides no money. For example, the federal government has required state and local governments to live up to the Americans with Disabilities Act without providing money to make buildings accessible to handicapped people. State governments resent unfunded mandates because they drain state coffers.

One way for Congress to pass mandates is to impose regulations and standards on state and local governments. In the past, Congress has forced state governments to meet certain environmental standards, for example. Scholars call this practice regulated federalism.


Because of the supremacy clause, all laws passed by the national government take priority over state and local laws. The national government, then, can override state laws if it can demonstrate a compelling national interest; this practice is called preemption.

Horizontal Federalism

Horizontal federalism refers to the ways state governments relate to one another. States often compete or cooperate on many different issues, from environmental policy to economic development. One state, for example, may lower its tax rate in order to attract businesses away from other states. States have a great deal of leeway in how they behave toward one another.

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