Categorical Grants: Definition & Examples

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Lesson Transcript
Instructor: Stephen Benz

Stephen has taught history, journalism, sociology, and political science courses at multiple levels, including the middle school, high school and college levels.

Categorical grants are the way in which the federal government influences local and state governments. These kinds of grants come with strict rules on their spending. We'll explore these limitations and look at some examples in this article.

Definition of Categorical Grants

Imagine you are the governor of a state, and you need funding for state projects. How would you like to receive a boatload of money from the federal government? Sounds good, right? Not so quick… there's always a catch!

This is the basic idea of a categorical grant. A categorical grant is money granted by the federal government to state and local governments, with strict limitations on how it is to be spent. The money can only be received if the state or local government complies with certain regulations. However, the states do not have to take the money if they do not want to comply with the regulations.

Categorical Grants and the Federal System

Categorical grants are a result of the United States's federal system. With this system, the federal government has power in some areas, such as military spending, while the state and local governments have power over other areas, such as schooling, roads and law enforcement. But just because certain areas are the domain of local governments does not mean that the federal government can't influence them. Instead, the federal government uses money to convince the states to comply with national goals. This is where categorical grants come into play.

Take education, for example. Nowhere in the Constitution does it say that the federal government should provide for education. Yet, we have a Department of Education in Washington, D.C. Why is that? The simple answer is that the Department of Education does not provide schooling. Instead, it provides federal money to local states to oversee schooling. However, the money is contingent upon local governments meeting the requirements set by the Department of Education.

Categorical grants are the most common types of grants given by the federal government to state and local governments, but they are not the only type. There also exist block grants, which are given by the federal government directly to local governments with few strings attached. They are basically the opposite of categorical grants.

Types of Categorical Grants

There are two ways in which categorical grants are distributed. The first way is through formula grants. Here, Congress decides how much it wants to spend overall on a project, and then the money is distributed to all states according to a formula. For example, food stamps are a national program designed to allow those in poverty the ability to buy food. The national government spends just over $75 billion on food stamps in 2013.

But how was that money distributed? Clearly, some states have higher levels of poverty than other states. So using a formula, the money was distributed to the different states based on the poverty levels and the number of people in each state.

Another type of categorical grant is a project grant. Rather than distributing money by a formula, these are competitive grants where local governments submit proposals in a bid to win government money. An example of a project grant was the Department of Education's Race to the Top. In this program, states competed for education money by making changes to their educational system, such as adopting the Common Core standards, uncapping the number of charter schools, and making improvements to the lowest-achieving schools. Several states tried to win the money, but federal money was only given to the select states that won the contest.

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