The allocation of a portion of federal tax income to state and local governments is a fiscal policy instrument. This mechanism involves the central government distributing funds to lower levels of government, allowing them to finance projects and services with federal dollars. For example, the national government might allocate a percentage of its income tax receipts to states to help fund education or infrastructure projects.
This practice can promote efficiency by enabling state and local governments to address specific needs within their jurisdictions without direct federal oversight, fostering greater autonomy. Historically, this approach was particularly prominent during the 1970s, with the intent of strengthening subnational governments and reducing bureaucratic obstacles. It allows for more tailored responses to local issues and can potentially stimulate economic activity at the state and local levels.