February 3, 2004


Iris J. Lav

PDF of report

View Related Analyses

If you cannot access the files through the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader.

President Bush has touted his budget as one that holds down spending.  One way he is appearing to cut spending is by passing down costs to other levels of government, leaving states and localities the option of either curtailing services or paying for those services with increasingly scarce state or local funds.

Table 1
Grants-In-Aid to State and Local Governments in the FY 2004 Budget, excluding Medicaid

Budget Authority (funding) in billions of dollars


FY 2003

FY 2004

FY 2005





Discretionary Funding




Mandatory Funding




Total Funding




Total Funding adjusted for technical anomalies*




      In 2005 dollars (i.e., adjusted for inflation)




      In 2005 dollars per capita (i.e., adjusted for both       inflation and population growth)**


Percent change after adjusting for inflation












Percent change, real per-capita grants

(i.e., after adjusting for both inflation and population growth)




* Adjustments were made to exclude disaster relief funding in all years and fiscal relief in 2003 and 2004,  to reflect funding for highways and mass transit as the level of obligations for those programs rather than the level of “contract authority,” to remove distortions that can occur when the level of “advance” appropriations changes from year to year.
** The dollar figures in these lines are the actual dollar figures, not figures in billions of dollars.


Discretionary and Mandatory Grants

The President’s 2005 budget proposes cuts in both discretionary grants that are appropriated annually and in entitlement programs.  The budget does not propose large cuts in specific major programs, but rather a myriad of small- and moderate-sized cuts in a large number of programs.


Future Years

Much deeper losses of federal grants would be in the offing in years after 2005 under proposals included in the President’s budget.  This would occur because the budget proposes a cap on discretionary spending.  A single cap would cover most discretionary spending, including defense, international, and most domestic discretionary spending.  This would put domestic and defense spending in competition for funding. 

If the levels proposed in the budget for defense, homeland security, and international affairs are fully funded — and some experts believe the budget understates the Administration’s future funding plans in those areas — domestic discretionary spending would be heavily squeezed.  By 2009, discretionary spending outside of these three areas would be substantially below the baseline level, which means it would be substantially below the level necessary to maintain current levels of programs and services.

Within domestic discretionary spending, grants to states and localities account for nearly one-third of the total.  Grants to states and localities would be likely to sustain at least a proportionate cut in funding if the proposed cap were to become law, and might be cut disproportionately if spending in other areas were protected.


Other Impacts of Budget on States

In addition to the loss of federal grants for programs, states face the loss of significant amounts of revenue as a result of the federal tax changes proposed in the Bush budget.  Federal tax changes often affect state revenues, because most states use federal definitions of income, federal depreciation allowances, and other features of the federal tax code as the basis for their own taxation.  The 2005 budget includes a number of tax initiatives that could result in the loss of approximately $5 billion in state revenues over the next five years.  (A forthcoming analysis will discuss these revenue issues in more detail.)