One way in which the federal government exerts an influence on local planning practice is through legal requirements, such as those discussed in connection with air quality in Chapter 16. However, the largest influence is through the giving of grants and the requirements that the federal government attaches to the receipt of those grants.

In 2008, the last full fiscal year before the financial crisis struck, federal grants to state and local governments totaled $495 billion, or approximately $1,600 for every person in the United States, and accounted for approximately one-fourth of total state and local government expenditures. With this flow of funds necessarily comes considerable oversight and control. This massive flow of funds has not always been a part of the U.S. political picture. In 1960 federal aid to state and local governments was about $7 billion.14 After adjusting that figure for inflation, there was a ninefold increase in federal aid between 1960 and 2007. Adjusting that figure for population growth yields a real per capita increase of about 5.4 times.

Why this pattern of transfers evolved can be explained in various ways. Sometimes it is said that the federal government can raise monies more easily than state and local governments because it has "the best revenue sources." This is largely a reference to the personal income tax, which over the years has proven to be highly income elastic.15 A more general explanation is simply that state and local governments are restrained in their taxing behavior by fear of losing residents and economic activity to other jurisdictions that tax more lightly. The federal government is not nearly so restrained in this regard.

Another explanation, which places its emphasis on political behavior rather than economic rationality, is offered by the Public Choice theorists. They attribute much of the expansion of the federal government's role in local and state affairs to the vote-seeking competition between politicians to deliver revenues raised elsewhere to their own constituents.16

There are few inducements to state and local action more powerful than the giving of money. Matching grants (50:50 and 90:10 are common ratios) induce states and localities to do many things that they would not do if they had to pay the full costs themselves. The Interstate Highway System was largely paid for by 90:10 federal funding. So, too, has been much investment in sewer systems and water quality treatment.

Making certain state and local actions a perquisite for receiving federal money enables the federal government to induce local actions that it has no power to compel directly. For example, the federal government has no literal power to compel a community to adopt certain procedures to include citizens in its planning processes. However, if the implementation of the plans, or even the formulating of the plans, will be done partly with federal funds, the federal government can achieve the effect of requirement simply by making citizen participation a requirement for the receipt of federal funds. Very often the federal government does not even need to monitor the behavior of the recipient government to achieve compliance. The reason is simple. If the local government violates a federal funding requirement, it is likely to face a lawsuit from some individual or group seeking to block its use of federal funds on the grounds that it has violated a condition of receiving such funds. For example, failure to include low- and moderate-income citizens in the decision-making process for community development planning is likely to bring such a suit from a low-income or minority advocacy group. Failure to heed guidelines attached to a federal grant for the construction of a wastewater treatment plant may bring a suit from an environmental organization. Thus, many of the guidelines attached to grants are self-enforcing.

The system described above is under pressure. When the Great Recession struck in 2008 federal tax revenues began to fall the the federal government's deficit rose very rapidly. On the fiscal side, the federal government's main response was to reduce expenditures. Closing the gap by increasing taxes was a political nonstarter. Whether "fiscal austerity" (cutting expenditures) was wise is a matter of argument. Republicans and some conservative Democrats were all for it. Those who took a Keynesian view of the nation's economic problems like the liberal Nobel Prize-winning economist Paul Krugman believed it was exactly the wrong thing to do.17 But regardless of the pros and cons it is what happened. The reduction in the downward flow of federal grants squeezed local governments directly and also indirectly, because the squeeze on state governments caused them to reduce their grants to localities. Thus federal influence over local planning activities, and local government activities in general, is probably somewhat weaker than it was several years ago. Nonetheless, it is still very powerful. This financial squeeze explains why for several years after the 2008 financial crisis while private sector employment was rising at a modest pace local government employment fell by some hundreds of thousands, particularly in education. At this writing, the economy continues to improve, state government revenues are rising, and state direct expenditures as well as grants to substate governments are rising. But federal grants to state and local governments are sharply restrained by intense pressure against federal expenditures as exemplified by the budget sequestration of 2013 as well as the government shutdown in the fall of the same year and the near shutdown the following year.

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