The Reagan Administration has embarked upon a New Federalism strategy designed to improve the operation of the American federal system by determining the proper roles of the private and public sectors in the provision OJ services, and by correctly allocating service responsibilities within the public sector among the three levels of government. The purpose of our paper is to examine this proposed strategy and its potential impacts on state and local government fiscal behavior. Our conclusion is that the most important influences on state and local government have been the recession and self: imposed revenue and expenditure constraints. The reductions in federal aid have nor had the principal impacts.