This policy brief discusses how certain types of state funding provisions create fiscal incentives for more restrictive placements for students with disabilities. This most likely occurs when funding systems are tied to the location in which the services are provided and a more restrictive placement will generate more state aid in relation to local costs than its less restrictive alternative. Because such incentives run counter to federal regulations, federal action to promote more placement-neutral funding systems may be warranted. The pros and cons of several federal policy options are considered. These options include: (1) making no change in federal funding policy, since many states are attempting to make appropriate changes to their funding formulas; (2) requiring state funding provisions that are placement neutral as a prerequisite to receiving federal funds; (3) providing education and assistance; and (4) unifying the federal position. The paper concludes that the most effective federal policy may be to provide education and technical assistance to the states to help them adopt and implement funding provisions that are consonant with overall federal and state policy goals. (DB)