School districts generally reduce taxes upon receiving federal and state aid. State-aided districts increase their expenditures to education only about 15 percent of the amount of the state aid, and reduce local tax levies by 85 percent. This substitution effect also accompanies federal aid to states. To meet this problem, Congress defines federal purposes and grants federal monies (categorical grants) only to accomplish these federally-defined purposes, which frequently differ from locally defined or state-defined purposes. The federally defined purposes are training manpower, increasing economic productivity, and increasing efficiency. One possible solution to the substitution effect would be to negotiate the budgets of local school districts at the state level, and to allow the federal government to deal with the states on a general aid basis. However, a powerful new tool to increase the effectiveness of categorical grants is program planning and budgeting systems (PPBS). PPBS is a highly systematized common language which should speed the trend toward the centralization of decision making in education. (HW)