Federal Grants to States

Federal aid to the states began with land grants, such as the Morrill Act of 1862, which gave states federal land to fund colleges, and grew with cash grants for highways under the Federal-Aid Road Act of 1916 and for welfare and public health in the New Deal. The Great Society of the 1960s created hundreds of new grant programs. Today federal grants to state and local governments total more than $1 trillion a year, roughly a quarter of federal outlays outside interest, and account for about a third of state government spending.

Medicaid is by far the largest grant, making up more than half of the total, followed by programs for highways and transit, education, nutrition, housing, and public health. Categorical grants fund narrowly defined purposes, block grants give states broader discretion within a policy area, and grants may be distributed by formula or awarded competitively. Congress often attaches conditions, such as the 1984 law that withheld highway funds from states with a drinking age under 21, which the Supreme Court upheld in South Dakota v. Dole in 1987, though in NFIB v. Sebelius in 2012 the Court held that threatening all of a state's Medicaid funds to force expansion was unconstitutionally coercive.

In 2025 the administration paused and then terminated many grants it said conflicted with its priorities, an OMB memo freezing federal financial assistance in January was rescinded within two days after a court challenge, and an August 2025 executive order required political appointees to review new grant awards. The 2025 reconciliation law also shifted some Medicaid and SNAP costs to the states. Supporters of tighter control said grants should advance national priorities and avoid waste, while state officials and critics said abrupt terminations disrupted services and that conditions increasingly intrude on state authority.