To determine whether the proposed federal legislation allowing tax credits for private schooling would move closer to achieving the goal of fiscal capacity neutrality, the author reviews the legislation, discusses its effects on students and taxpayers, and proposes a tax credit system that achieves equity for students in both public and private schools. The provisions of the 19 tax-credit bills before the 97th Congress are described, as are the Reagan Administration's preferences on the issue. It is concluded that even a compromise tax-credit bill would raise the level of public expenditure per pupil enjoyed by private school users and violate the principle of fiscal capacity neutrality. The proposed legislation would also probably lead to a reduction in the local and state tax rate to support public education. Adapting Martin Feldstein's proposals for fiscal capacity neutrality, the author proposes opening a free-market competition between public and private schools by eliminating local governments' taxing for education and granting tax credits to public and private school users on the basis of their incomes, with large enough credits to poorer taxpayers to maintain fiscal neutrality and to richer taxpayers to avoid financial recapture. (JW)