FISCAL CAPACITY AND THE ESTIMATION METHOD OF THE ADVISORY COMMISSION ON INTERGOVERNMENTAL RELATIONS

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Abstract
Estimation of fiscal capacity — ability of governmental units to raise tax revenues from their own sources — is difficult both conceptually and empirically. Recently, because of the renewed popularity of the idea of revenue sharing as well as recent court decisions dealing with the ability of local school districts to adequately finance education, measurement of fiscal capacity has become an important policy issue. This paper's main focus is both a critique of the most widely publicized fiscal capacity estimation method, that of the Advisory Commission on Intergovernmental Relations (ACIR), and a suggestion of an alternative estimation technique. The ACIR measure is singled out as a focus of criticism because of its apparent widespread acceptance by policy analysts and policy makers. Perhaps this paper will serve to stimulate further thought and research upon this topic before programs of aid based upon any specific fiscal capacity measure are adopted.

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