Abstract
Since 1977, the constant-dollar value of federal intergovernmental grants has been reduced by 9.5% and their share of state and local revenue has declined from 22% to 17%, a trend that is expected to continue. Even more pronounced than this decline is the change in the mix of grants. Contributing to the decline are: 1. the repeal of the deduction for state and local motor fuel taxes, 2. the repeal of the deduction for state and local general sales taxes, 3. cuts in marginal tax rates for households, 4. reductions in the top federal corporate tax rate, 5. the curtailment of federal deductions, and 6. the property tax revolt. On the whole, deductibility is inferior to grants as an instrument of intergovernmental aid because it exacerbates interstate disparities in fiscal comfort and because its cost in forgone revenue, its subsidy value, and the geographic distribution of benefits are difficult to control. Neither grants nor deductibility are a cost-effective stimulator of state and local spending.