This paper develops new measures of environmental costs and local revenue capacity as the basis for a new municipal aid formula in Massachusetts. On the cost side, unlike previous studies, we quantify the effects on local non-school spending of characteristics related to uncontrollable costs. On the capacity side, we account for the constraints of a tax limitation, for the first time in the literature, by estimating these constraints as a function of residents' incomes. The estimates of costs and capacity indicate substantial inter-local fiscal disparities in Massachusetts. Our approach is potentially applicable to other states.

Also released as New England Public Policy Center Working Paper No. 06-3.

This paper was revised in May 2007.