ABSTRACT
Switching from matching grants to block grants for the funding of welfare or Medicaid would create strong pressures on state policymakers to shift state funding away from these programs. This chapter predicts how state governments would respond to the adoption of such block grants. It provides a conceptual framework for comparing fiscal incentives under the current system and under block grants. The chapter reviews the statistical evidence on state responses to matching aid and block grants, and present summary estimates of the effects of changing from matching aid to block grants. It considers the fiscal risks that states will face during recessions under fixed block grant allocations. Conservatives recognize that centralization of financing makes possible a higher level of combined spending on the poor than decentralized financing. The evidence indicates that states do respond to lower tax prices by increasing their spending on welfare and Medicaid.
