In this article, we seek to advance scholarship on the origins and consequences of policy devolution by analyzing state decisions to give local authorities control over welfare policy. The first part of our analysis explores the political forces that systematically influence state decisions to cede policy control to lower-level jurisdictions. In this context, we propose a general Racial Classification Model of how race influences social policy choice. Our findings support this model as well as social control perspectives on welfare provision. Building on these results, we then show how modest but consistent racial effects on policy choices concatenate to produce large disparities in the overall policy regimes that racial groups encounter in the federal system. The empirical findings illuminate the fundamental role that federalism plays in the production of contemporary racial disparities and in the recent turn toward neoliberal and paternalist policies in American poverty governance.