State AId to Offset Fiscal Disparities Across Communities

Both the availability of taxable resources and the costs of producing local services vary widely across jurisdictions. This situation is widely regarded as inequitable, and many state aid programs have been designed to offset the fiscal disadvantages faced by jurisdictions with relatively low resources or relatively high costs. Existing programs, however, account for these fiscal disparities in an ad hoc manner, particularly on the cost side. This paper defines the concept of uncontrollable costs, presents a regression-based method for measuring cost differences, calculates a community's fiscal disadvantage as a function of its costs and resources, and designs state aid programs to offset this fiscal disadvantage. The approach presented here is based on simple concepts and can be implemented with readily available data. It was developed as part of the debate over state aid in Massachusetts where a modified version of the approach has recently been enacted.