Do Federal Grants Sabotage Regulatory Reform?

There’s been much attention to Donald Trump’s streamlining and “deconstruction” of conventional notice-and-comment regulation this year – a campaign that includes Congressional Review Act resolutions of disapproval overturning 16 late-term Biden regulations. Yet it’s notable that both houses of Congress have not come together on general regulatory process reform.

Let the Deconstruction Commence

Author and Competitive Enterprise Institute

In the mid-1990s, state and local officials, concerns that their priorities were getting undermined by unfunded federal mandates, joined with small business to protest red tape. That rare, now almost unthinkable, bipartisan push produced several major reforms – signed into law by none other than Bill Clinton:

• Unfunded Mandates Reform Act (1995): Required disclosure of costs of certain federal mandates on businesses and state, local, and tribal governments;
• Paperwork Reduction Act Amendments (1995): Aimed to improve federal information management and curb paperwork-hour burdens on individuals, businesses and governments;
• Small Business Regulatory Enforcement Fairness Act (1996): Expanded small-business voice in rulemaking and created an ombudsman to help challenge overreach;
• Congressional Review Act (1996, part of SBREFA): Allowed Congress to review and nullify new federal regulations by joint resolution;
• Regulatory Right-to-Know Act (1998): Required an annual accounting of total regulatory costs and benefits by the Office of Management and Budget;
• Truth in Regulating Act (2000): A pilot program that authorized the Government Accountability Office to independently evaluate economically significant federal rules.

While many of these contain loopholes or are simply disregarded, we now see the executive branch pursuing an unprecedented streamlining of conventional rulemaking. What’s missing is outside pressure – like that of the mid-1990s – to push Congress to make reforms such as Trump’s “one-in, ten-out” cost containment rule permanent.

To be sure, bills have been introduced to do just that. Sen. Joni Ernst’s Searching for and Cutting Regulations that are Unnecessarily Burdensome (SCRUB ) Act would codify elements of the Trump and Department of Government Efficiency (DOGE) initiatives. The Guidance Out of Darkness (GOOD) Act would create permanent online portals for disclosure of sub-regulatory guidance documents, similar to portals established during Trump 1.0 that Biden revoked.

But there’s been little traction to move such bills to Trump’s desk. A stripped-down version of the REINS Act, which would have required congressional approval of certain regulations, was dropped from the “One Big Beautiful Bill” on procedural grounds; but so was more funding for the Office of Management and Budget to perform regulatory review.

What explains this lack of engagement or urgency?

Dampening Opposition

Back during the Biden administration, we noted that ballooning federal spending and regulation seemed to be swapping unfunded mandates for funded ones – transforming small business and what should be independent state and local governments into dependents appealing for still more federal funding. Progressives may have discovered that dollars can dampen what was once a strong coalition for regulatory reform.

If the deregulatory elements of Trump’s agenda are to work and endure, policymakers need to confront the reality that federal spending may now be buying off the natural opposition to Washington’s interference. Small businesses – beneficiaries of record-level federal loan guarantees – and state and local governments alike are queuing for dollars.

We’re talking huge sums. The Congressional Research Service’s (CRS) 2025 report Federal Grants to State and Local Governments: Trends and Issues estimates that federal grants-in-aid to lower-level governments for fiscal year 2024 exceed $1.1 trillion, around 16% of the entire federal budget.

That’s money originating in the states with taxpayers, orbiting Washington, and then returning – laden with strings.

CRS notes that these grants account for over a third of state and local government revenues, covering health care, transportation, education, job training, social services, and environmental protection – all ripe for federal “regulatory” influence once the dollars flow.

More than half of medical and social assistance programs are now federally funded, a dependency on display in the current shutdown.

CRS says that “the 10 largest federal grants to state and local governments comprised 77.5% of total outlays for federal grants to state and local governments.” Here’s that breakdown.

To be sure, grants in aid to states have been around for a long, long time; but there are more overlapping programs and agendas now, and the federal government has never been so large. Many programs have been affected by huge spending bills of recent vintage including the CARES Act, the Inflation Reduction Act and the Infrastructure Investment and Jobs Act. Late in his term, Biden toured the nation touting infrastructure money pouring into the states from Washington, and ridiculing Republicans who’d objected to it, joined on stage by federal, state and local politicians praising the grants and union labor and hoping for more.

Should we expect local politicians elected in this environment be interested in cutting spending and regulation?

Federalism, Anyone?

Federal grants-in-aid to states and localities – like the parallel universes of business subsidies, the contracting/procurement behemoth, and university grants – arrive not as blank checks, but as regulatory instruments. They can be laden with conditions, reporting requirements and guidance that extend Washington’s reach into every sphere. But for politicians and public administrators steeped in this system, it’s effectively a permanent party.

This cultivated dependency has eroded the prospects for limited government. What were once unfunded mandates that inspired rebellion are now funded mandates that pacify – and even energize – support for Washington’s involvement. Rather than resist new dictates, states chase grants that paradoxically bind them tighter. No wonder so many are marching now, furious over potential cuts during the shutdown.

Rather than federalism there is a systemic loss of independence at state and local levels, with Washington involved in everything.

Breaking The Cycle Of Dependency

Congress faces a choice. A generation ago, unfunded mandates made states and small business allies in the fight for red-tape relief. There was common cause in pushing back. Now, the common cause has shifted to chasing federal dollars. Rules that once might have spurred revolt are instead celebrated at conferences of mayors and governors because they come wrapped in checks. The only revolt comes when the money stops flowing.

A better approach on concerns like transportation, education, health, job training and all the other grant-in-aid programs is to leave the dollars in the states in the first place, as former U.S. Senator and federal judge James L. Buckley argued in Saving Congress from Itself. This should be accompanied by rollbacks of university funding (as opposed to the “compacts” being offered to them by Trump) and bans on private aid to businesses and corporations that invite Washington’s regulatory strings.

Reinvigorating a lasting coalition for regulatory reform will take more than unilateral trimming by the executive branch – or even the broader congressional streamlining urged here. It means confronting and breaking the deeper cycle of dependency that binds lower governments and the private sector alike to Washington’s purse. That will only happen by dismantling the federal statutes, agencies and commissions and consulting class that administer it all from the comfortable suburbs encircling Washington, D.C..

Until then, no one need ever fret over states rising up, they’ll line up instead.