Funding of Constitutional Officers - Virginia Joint Legislative Audit ...

Calculating Reyenue Capacity
Revenue capacity represents a significant improvement over many other
measures of local ability to generate revenues. Measuring the revenue capacity of
Virginia localities is not a new concept,however. It has been used since 1977, and was
further revised and updated in the 1980s by JLARC and the Commission on Local
Government. It is based on the revenue-generating capacity of cities and counties, if
statewide average tax rates are applied to their tax bases.
The concept ofrevenue capacity was originally developed by the U.S. Advisory
Commission on Intergovernmental Relations (ACIR). The measure computes the
potential revenues that localities can raise or produce, ifthey impose or levy statewide
average tax rates for each ofthe major tax instruments. That is, the major tax bases in
a locality are multiplied by the average statewide tax rate for those tax bases. Thus:
local tax base
x statewide average rate = potential revenue yields
The sum of potential revenue yields across the different tax bases is the
revenue capacity of the locality, assuming the use of average tax rates. Revenue
capacity measures five components: (1) real estate and public service corporation
property tax revenues, (2) tangible personal property tax revenues, (3) motor vehicle
license tax revenues, (4) sales tax revenues, and (5) all other locally-generated revenues
proxied by adjusted gross income. Exhibit 5 illustrates the revenue capacity
calculation.
Measuring Real Estate and PSG Property Revenue. The potential revenues a
locality can raise from the real estate property tax are calculated by multiplying the
statewide "average" true effective tax rate by the local estimated true value (ETV) of
real estate property. "Effective" refers to the standardized base, and is determined by
dividing the statewide sum ofreal estate levies by the statewide sum ofthe ETV ofreal
estate property. This allows for interjurisdictional comparisons. The same procedure
is followed for measuring potential revenues from public service corporation property.
Measuring Tangible Personal Property Revenues. Revenues derived from
tangible personal property taxes consist of taxes levied on motor vehicles, boats,
machinery and tools, and other items. Assessment procedures and tax rates vary
across localities. The levy on motor vehicles produces the majority ofall revenue from
tangible personal property taxes. Theref@re, the number ofmotor vehicles registered
in each locality was used as a surrogate for the actual size of the tax base, which may
include additional items.
Statewide total tangible personal property tax levies were used to determine a
dollar-per-vehicle measure. This measure represents the average tax yield (known as
the tangible personal property bill) for each registered vehicle in Virginia. This
amount was multiplied by the number of vehicles registered in each locality to
,....,.,,,,,11,,,,", the estimate of the potential revenue that could be generated from tangible
personal taxes, assuming a statewide average tax rate was applied.
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