Fiscal Neutrality

A third issue associated with horizontal and vertical equity is fiscal neutrality. This concept can be

complicated in thought and measurement. For our purposes, fiscal neutrality is funding education based on

what an educated public wants to provide rather than funding based primarily on the wealth of the state or the

locality. Therefore, if the public wants X level of services for all students at the state level, the lack of School

District A’s fiscal capacity to pay for those services should not interfere with that level of services the district provides.

According to fiscal neutrality, equity is achieved when the taxpayers’ preferences for education—not the

locality or state’s fiscal capacity—determines the distribution of services. This is also known as taxpayer equity

or wealth neutrality. Fiscal neutrality is an indication that the funding system provided by the state allows school

districts to spend relatively equal amounts for a given tax rate, which includes state and local dollars. If this

measurement is the same across districts in a state, the formula provides for fiscal neutrality.

The question then becomes, how do states impart fiscal neutrality while also accommodating equity

issues? The answer is rather simple. As discussed earlier, one of taxes’ purposes is to redistribute wealth.

States need a method to calculate a lower services cost to those who can least afford to pay for them.

Likewise, states need a method that requires those who can afford to pay more to shoulder a greater share of education’s expenses. That concept, known as fiscal equalization, will be discussed next.