The fiscal capacity index measures the ability of a jurisdiction to raise revenue. To construct a jurisdiction's fiscal capacity index, the study estimated the revenue that each jurisdiction could raise if the same revenue sources and same rates were imposed. This approach allows for a comparative look at revenue raising abilities of each jurisdiction so that different counties can be compared to one another.

The first step in constructing the index of fiscal capacity is to determine which revenue sources will be included. The sources included in the development of the fiscal capacity index were property taxes, sales taxes, and other revenues (which includes licenses, permits, fees, service charges, and other tax revenue). The study assumes that all of these revenue sources are available to each jurisdiction.

The second step is to select the rates for each revenue source. For property tax, a rate was set using the actual amount of property tax collected by counties across the state. For the sales tax, the study assumed a 1 percent rate (a local option sales tax). Since other revenues could include a large number of revenue sources, it was not possible to determine a specific base for each. Instead, the study assumed that the revenues from these sources are related to the aggregate personal income within the jurisdiction.

The third step in the process is to determine the value of the base for each of the revenue sources for each county. Applying the selected rates to each revenue source yields the estimated revenue that would be generated from each revenue source. These amounts were then summed for each jurisdiction. A capacity index was then constructed using 100 percent as the state average for capacity. A capacity index below 100 means that jurisdiction's ability to raise revenues is less than the state average; correspondingly, an index above 100 means that jurisdiction's ability to raise revenues is greater than the state average.

The index of fiscal effort compares the actual revenue that a government collects with the potential revenue it could collect, or its fiscal capacity. Fiscal capacity is a measure of the ability of a jurisdiction to raise revenue. To calculate the fiscal effort index, the actual revenue collected by the government from specific revenue sources is divided by the measure of fiscal capacity. Thus, fiscal effort takes the amount of revenue collected and divides it by the amount of revenue that could be collected to express the jurisdiction's revenue generating effort as a percentage.

For example, if a county has a fiscal effort index of 50 percent, that means the county is collecting half of the revenues that could be collected if it were using its full fiscal capacity. Put another way, a county with a fiscal effort index of 50 percent could double its revenue by using rates that are average for the state.

Since not all local governments have the same potential for raising revenues, the fiscal effort index strives to create a measure of effort based on the individual jurisdiction's revenue raising ability. As with all measures, this index does have some weaknesses. The system assumes that all jurisdictions have the ability to collect the revenue sources included in the fiscal capacity index and that all jurisdictions have the ability to set rates at the state average. These assumptions might not hold true for all jurisdictions given the political landscape.

A fiscal effort index was calculated for each county. For the 1998 and 1999 reports, fiscal efforts were not calculated for the three consolidated governments – Augusta-Richmond, Athens-Clarke and Columbus-Muscogee. We were also unable to calculate a fiscal effort index for counties that failed to submit the annual DCA finance survey (see Jenkins County).

For a detailed methodology report of this indicator, please contact our office at 404/679-3145.