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.