This chapter looks at history to identify instances where state action has been important, if not decisive, in economic development. It examines the contemporary role of state government by reviewing the principal functions of state governments that can affect the economy of a state. These functions include fiscal policy, regulation, infrastructure provision, and economic development programs. Though the United States Constitution defined a federalist system with a fairly clear delineation of responsibilities between the federal and state governments, this system has evolved substantially during the last two centuries. State tax policy has received much attention in discussions of state economic development policy. The increasing involvement of state governments in economic development is amply documented by the proliferation of state economic development plans and programs. State governments undertake a broad range of regulatory activities that clearly affect businesses and individuals. The chapter concludes by assessing the potential of current state strategies to promote development given the forces of structural change.