THE REPORT BEGINS WITH A DESCRIPTION OF THE INTERSTATE DIVERSITY IN FISCAL ARRANGEMENTS THAT PRESENTLY EXISTS IN THE UNITED STATES. THIS VARIETY OF FISCAL RELATIONSHIPS IS CONSIDERED IN TERMS OF STATE VERSUS LOCAL RESPONSIBILITIES FOR THE FINANCING AND DELIVERY OF PUBLIC SECTOR ACTIVITIES, AND STATES ARE CLASSIFIED ACCORDING TO THESE CHARACTERISTICS. IN CHAPTER THREE, ATTENTION IS INITIALLY FOCUSED ON A DESCRIPTION OF THE FEDERAL GRANT SYSTEM, INCLUDING A TYPOLOGY OF FEDERAL GRANTS BASED ON A RANGE OF GRANT CHARACTERISTICS AND THEIR POTENTIAL FOR DIVERSE EFFECTS. THE ISSUE OF STATE PARTICIPATION IN VARIOUS FEDERAL GRANT PROGRAMS IS ANALYZED. ANOTHER CHAPTER EXAMINES THE IMPACT OF FEDERAL AID ON AGGREGATE STATE AND LOCAL GOVERNMENT EXPENDITURES, EMPLOYMENT, AND WAGE RATES. THE STUDY FOUND THAT, IN THE AGGREGATE, FEDERAL GRANTS ARE STIMULATIVE; THAT IS, FOR EACH ONE DOLLAR OF FEDERAL AID, MORE THAN ONE DOLLAR OF STATE-LOCAL SPENDING RESULTS. (AUTHOR ABSTRACT)...KAP