DEFINITION of Fiscal Capacity

Fiscal capacity In economics,  is the ability of government, groups, institutions, etc. to generate revenue. The fiscal capacity of governments depends on a variety of factors including industrial capacity, natural resource wealth and personal incomes.

BREAKING DOWN Fiscal Capacity

When governments develop their fiscal policy, determining fiscal capacity is an important step. Identifying fiscal capacity gives governments a good idea of the different programs and services that they will be able to provide to their citizens. It also helps governments determine the tax rate necessary to provide a certain level of programs. The theory behind fiscal capacity can also be used by other groups, such as school districts, who need to determine what they will be able to provide to their students.

Fiscal Capacity Example

Colorado's school finance initiative, for example, looked at the fiscal capacity of the states school districts in 2016 and found wide disparities in what each could raise through taxes, noting that districts have no control of what one mill can raise. The mill rate is the amount of tax payable per dollar of the assessed value of a property. The mill rate is based on "mills." It is a figure that represents the amount per $1,000 of the assessed value of property, which is used to calculate the amount of property tax.

In Colorado, 1 mill raises a low of less than $4,000 to a high of over $13 million. The average dollars raised by 1 mill is about $500,000.
The median is $110,000. One mill per student raises a low of less than $20 to a high of over $3,000. The average dollars per student raised by 1 mill is about $280 and the median is about $130.

The “Amount Raised by 1 Mill” examines how much a district can raise levying 1 mill against assessed value. The average amount raised is $578,590 with a median of $111,054 and a range from $3,842 to $13,221,694. In terms of fiscal capacity, the school district with the highest fiscal capacity can can raise taxes by 1 mill and generate $13.2 million in revenue while the lowest-capacity district can only generate $3,842 from the same move. 

Of course, larger districts have more students and taxpayers to cover the larger bills. Note that in Colorado, to help equalize shool funding, the state pays about two-thirds of school district expenses while towns and cities pay the rest.

The point is that fiscal capacity is vitally important to government in terms of providing for their residents.