January, 2009

The American Recovery and Reinvestment Act: Is More Federal Grant Money What the States Need?

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To end the current recession, Congress and the Obama administration propose the American Recovery and Reinvestment Act of 2009 (ARRA), an $825 billion fiscal stimulus package made up of tax cuts and federal spending. A significant component of this package consists of federal grants meant to help states facing unprecedented budget shortfalls.

While federal grants may provide temporary relief for state budgets, the size and scope of the proposed spending will worsen already-distorted state and local fiscal practices while creating perverse incentives inducing greater public spending with scarce state funds. By fracturing the link between those who benefit (local constituencies) and those who pay (federal taxpayers), ARRA reduces government accountability on all levels and ultimately erodes local control over policy by imposing federal solutions on local problems.

Instead of attempting a short-term fix of amplifying the grant system through an emergency stimulus package, the federal government should work to make state and local governments accountable for their own spending decisions. This means reducing states’ and localities’ reliance on federal funding for local priorities and allowing local activities to be addressed by the appropriate mechanisms: state and local governments and the private and philanthropic sectors.