This study attempts to determine the potential economic impact of increasing levels of intergovernmental educational grants on school district spending decisions. This question is addressed through a cross-sectional analysis of the choice decisions made by 192 school districts in Kentucky. A conceptual model that evaluates the trade-off between educational service expenditure and local tax burden is developed and empirically tested. Results of the analysis suggest that in the long run, school districts in Kentucky tend to substitute state and federal efforts for local efforts. The estimated differences in the state and federal aid coefficients indicate that state aid is more efficient in achieving the desired objective of improving the distribution of educational support programs. The results also suggest a price inelastic demand for educational service. (Author/JG)