A categorical grant is a type of grant issued by the United States Congress that can only be spent for narrowly defined purposes. These grants are the main source of federal aid to state and local governments and can only be used for specified categories of state and local spending, such as education or roads. Categorical grants are intended to help states improve the overall well-being of their residents, but also empower the federal government to exert more power over the states within a specific policy area.

There are four types of categorical grants:

• Formula grants: These are distributed to jurisdictions entitled to funds by the authorizing statute on the basis of a numeric formula that takes into account the relative need of the recipient jurisdiction compared to all other entitlement jurisdictions.

• Project grants: These are awarded on a competitive basis by the administering agency, generally following the review of a grant application.

• Formula-project categorical grants: These involve a two-stage grant distribution: first, a formula grant is used to apportion funding among the states, and then project grants are awarded by state officials to state and local government agencies.

• Open-ended reimbursement grants: These are awarded to states or localities that incur costs in carrying out a federal program.

Categorical grants can be awarded on a competitive basis, as reimbursements for program costs, or according to a preset formula set by Congress or an administrative agency. The way categorical grants are distributed is either through project grants or formula grants.