Since the 1960s, educators and policymakers have been concerned with the overrepresentation of Black students in special education compared to their White counterparts. In 2004, Congress reauthorized the Individuals with Disabilities Education Act (IDEA) and included in it financial incentives for school districts to reduce their level of racial disproportionality in special education. This paper presents evidence of the effect of the disproportionality penalties under the IDEA 2004 on the Black-White identification gap. Using a difference-in-differences approach, I exploit the variation by race in the marginal cost of an additional special education student for districts close to the policy threshold. The results indicate that the IDEA policy change induced districts sanctioned under IDEA to lower their relative disproportionality measure by 36 percent. Moreover, the reduction in the overrepresentation of Black students was achieved by lowering the proportion of Black students in special education programs rather than increasing the proportion of White students. These results provide strong evidence that school districts have the ability to lower their levels of overrepresentation, which has been a debated issue in education policy.