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Implicit Price Deflator Exceeds 1%


September 21, 2017 by Toni Nelson
Category: Economic, Population and Historical Tax Data

Implicit Price Deflator Exceeds 1%

As of September 25, 2017, the rate of inflation on the implicit price deflator (IPD) for personal consumption expenditures over the past 12 months is 1.553%, which means that local governments, regardless of whether they have populations greater than or less than 10,000, may levy the full 1% increase as allowed by statute (RCW 84.55.005) or bank this capacity for future use.

This is the first time in the past two years that many local government jurisdictions will not have to concern themselves with adopting a separate ordinance and/or resolution for substantial need. Over the past nine years, the IPD has fallen below the 1% inflation mark three times, where previous to that it had not fallen below 1% in over a decade. 

The Economic Outlook

The current economic indicators from the Bureau of Economic Analysis (BEA), the Washington State Economic and Revenue Forecast Council (ERFC), and others suggest a continuation of slow but steady growth. The second estimate of Quarter 2 real GDP growth was revised up from 2.6% to 3.0%; personal consumption expenditures grew at a rate of 3.3%; and two key measures of consumer confidence increased in the month of August.

I am not an economist but I just got back from the annual WFOA conference in Kennewick where speaker and economist Dr. Christopher Thornberg provided a generally positive economic outlook for the nation and especially so for Washington State.

How Is The IPD Calculated?

The Washington State Department of Revenue (DOR) calculates the IPD using the most recent numbers reported by the Bureau of Economic Analysis (BEA). BEA publishes an estimate of the quarterly IPD numbers on a monthly basis. These quarterly numbers are then seasonally adjusted each year in July. These seasonal numbers form the basis for the prior year’s IPD personal consumption expenditure number that is used by the Department of Revenue (DOR) for the calculation of inflation.

This year, like most years, the September release falls after September 25th. Why should we care about the date? According to RCW 84.55.005, the definition of inflation for setting property tax levies:

…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 rate of inflation is calculated by dividing the Quarter 2, 2017 IPD for personal consumption expenditure (seasonally adjusted) by the Quarter 2, 2016 IPD number, subtracting 1.00 and multiplying by 100. Since the BEA’s next release will not be until September 28, the August 30, 2017 release is used in this year’s calculation.  The numbers are as follows:

Quarter %  
Quarter 2 2016   110.550 (seasonally adjusted)
Quarter 2 2017 112.267  (second estimate, August 2017)
Percentage Change for IPD (Inflation) = 1.553%

What Does It Mean for Local Governments?

The only limitation that local government must concern itself with is the 1% levy increase limit set in RCW 84.55.005 (2) (a-c).  With the IPD inflation rate in excess of 1%, the limit factor as defined by statute is applicable to all taxing districts.

Local government entities must still adopt a property tax levy ordinance stating the increase over last year’s levy in terms of a dollar amount and percentage. The maximum that you can increase the levy is 1% percent; however, there is another option a jurisdiction may want to consider. 

RCW 84.55.092 allows you to bank capacity for the future if the full 1% is not needed for the next fiscal period. During the levy setting process a local government has the ability to use all, some, or none of this 1% increase over last year’s levy.  If your jurisdiction does not need the full 1% for the next budget period than banking your capacity for the future may be an alternate fiscal tool that will provide a future benefit. These decisions are all part of the budget process and will be unique to each jurisdiction.

In the event that you wish to bank capacity for the future, your property tax levy ordinance or resolution must simply 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.

If you have any questions about the levy setting process, visit our Property Tax in Washington State webpage or send me an email at tnelson@mrsc.org

Questions? Comments?

If you have any questions about the IPD, or other local government finance issues, please use our Ask MRSC form or call us at (206) 625-1300 or (800) 933-6772. If you have comments about this blog post, please comment below or email Toni Nelson 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

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