Any interstate comparison that does not take differences in the cost of education into account will give an incorrect impression of the relative levels at which different states support their schools. The lack of cost-adjusted statistics on state expenditures for elementary and secondary education interferes with policy analysis, resource allocation, and decision making in education. An examination of state cost data indicates that there is substantially more interstate variation in per-pupil spending than in the amounts of the main educational resource--instructional staff--that states provide for each pupil. In fact, the main conceptual and technical problems in constructing a cost-of-education index arise from the labor-intensive nature of education and the types of labor on which schools rely. This report evaluates some ways of constructing cost-of-education indices, focusing on existing approaches rather than proposing new ones. Conceptual advantages of econometric supply-demand modeling approach are noted, as are its practical disadvantages. Improvements in databases should make construction of a model-based cost-of-education index much more feasible in the near future. Chapters are: (1) "Introduction: Cost Differentials and Cost-of-Education Indices"; (2) "Conceptual Foundations of Cost-of-Education Indies": (3) "Alternative Index Construction Methods"; (4) "Demonstration and Assessment of Simple Cost Indices and Proxies"; and (5) "Conclusions: Current Capabilities and Promising Options." (Contains 19 tables and 48 references.) (SLD)