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Implicit Price Deflator Falls Slightly Below 1% for Setting 2017 Property Taxes


September 29, 2016 by Toni Nelson
Category: Economic, Population and Historical Tax Data

Implicit Price Deflator Falls Slightly Below 1% for Setting 2017 Property Taxes

Editor's Note: This information is historical. For the current IPD, see our page on the Implicit Price Deflator.

As of September 25, 2016, the rate of inflation on the implicit price deflator (IPD) for personal consumption expenditures over the past 12 months is 0.953%, which means that local governments with a population of 10,000 and greater will have an additional step in the property tax levy setting process if they wish to levy the full 1% increase as allowed by statute or bank this capacity for future use.

This is the second year in a row and the third time in the past eight years that the inflation rate has fallen below one percent.

How Was the IPD Calculated?

The state Department of Revenue (DOR) calculates the IPD using the most recent numbers reported by the federal Bureau of Economic Analysis (BEA). Every month BEA publishes an estimate of the quarterly IPD numbers. These quarterly numbers are seasonally adjusted each year in July, and these seasonal numbers form the basis for the prior year IPD personal consumption expenditure number that is used by DOR to calculate inflation.

This year, like most years, the September BEA release falls after September 25. Why do we care about the date? The definition of inflation for setting your property tax levy (RCW 84.55.005) is:

"Inflation" means the percentage change in the implicit price deflator for personal consumption expenditures for the United States as published for the most recent twelve-month period by the bureau of economic analysis of the federal department of commerce by September 25th of the year before the taxes are payable;

The BEA’s next release will not be until September 29, so the August 2016 release is used in this year’s calculation. The numbers are as follows:

            Quarter 2 2015             109.470 (seasonally adjusted)

            Quarter 2 2016             110.513 (preliminary as of August 2016)

The rate of inflation (percent change) is calculated by dividing the Quarter 2 2016 number by the Quarter 2 2015 number, subtracting one, and multiplying by 100.

What Does It Mean for Local Governments Over 10,000 Population?

If you are a local government with a population of 10,000 or more, your property tax increase is limited to the lesser of 1% or the IPD (RCW 84.55.005), which this year means it is limited to 0.953 percent.

However, you can still levy the full one percent, or bank the capacity for the future, if you pass an ordinance or resolution of “substantial need” (RCW 84.55.0101). (For examples, see our webpage on the Implicit Price Deflator.) If your council or board has five or more members, the ordinance or resolution must be approved by a “majority plus one” supermajority for passage. If your council or board has four members or less, it must be approved by a simple majority.

The next question that I frequently get asked is, "What is the definition of substantial need?" The answer, although I hate to say this, is it depends upon the needs and requirements of your jurisdiction. Each of us provide different services to our citizenry and different criteria to fulfill the demands of those services.

And while we may have a defined set of circumstances for delivery of services in 2016, will these circumstances remain consistent from year to year? Banking your capacity for the future may be more important than asking for the increase in this next fiscal period. Once again, each of us is unique.

So you want to bank capacity? That just means that you need to adopt the ordinance or resolution - but state that you are increasing by a percentage less than allowed (for example, 0.5% rather than 1.0%). This will automatically bank your remaining lawfully allowed capacity for the future.

What About Local Governments Under 10,000 Population?

If you are a local government entity with a population of less than 10,000, it's business as usual and the IPD does not affect your property tax rates. You must adopt a property tax levy ordinance stating in terms of amount and percentage the increase over last year’s levy, and the maximum that you can increase the levy is one percent.

Questions? Comments?

If you have any questions about this process, or if you have another topic you would like me to write about, leave a comment below or contact me directly at tnelson@mrsc.org

About Toni Nelson

Toni has over 24 years of experience with Local Government finance and budgeting. Toni's area of expertise include "Cash Basis" accounting and reporting, budgeting, audit prep and the financial issues impacting small local government.

VIEW ALL POSTS BY Toni Nelson

Comments

"Thanks for the great information Toni."

Sharon Bounds on Sep 30, 2016 7:16 PM

1 comment on Implicit Price Deflator Falls Slightly Below 1% for Setting 2017 Property Taxes

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