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Categorical grants are the main source of federal aid to state and local government, can be used only for specific purposes and for helping education or categories of state and local spending.
Categorical grants are distributed either on a formula basis or a project basis. For project grants, states compete for funding; the federal government selects specific projects based on merit. Formula grants, on the other hand, are distributed based on a standardized formula set by Congress.
During the development of the Interstate Highway System, congressional grants provided roughly 90% of the funding. Categorical grants may be spent only for narrowly defined purposes and 33% of categorical grants are considered to be formula grants. Examples of categorical grants include Head Start, the Food Stamp Program, and Medicaid.
This type of grant differs from block grants in that block grants are issued in support of general governmental functions such as education or law enforcement. State and local recipients have more disecretion in determining how best to use the money.
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