This page provides information on the implicit price deflator (IPD) and how it affects property tax rate setting for local governments in Washington State, as well as recent IPD data and sample resolutions/ordinances of "substantial need" if the IPD falls below 1%.

Overview

The implicit price deflator for personal consumption expenditures is a figure used to measure inflation, and it can impact how much property tax revenue a jurisdiction can collect in any year.

Under state law, no local government may increase its property tax levy more than 1% in a given year, and local governments with a population of 10,000 or more are limited to the lesser of 1% or the annual rate of inflation as measured by the IPD (RCW 84.55.005 - .010). However, if inflation falls below 1%, a jurisdiction with a population of 10,000 or more may adopt a resolution of "substantial need" allowing it to increase the levy (or bank the excess capacity) up to the full 1 percent.

A few jurisdictions also use the implicit price deflator as an inflation index for certain fees or benefits, although it is more common to use the Consumer Price Index.

How is the IPD Calculated?

The definition of "inflation" for setting a 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 state Department of Revenue (DOR) calculates the IPD using the most recent quarterly numbers reported by the federal Bureau of Economic Analysis (BEA).

Near the end of every month, BEA publishes an estimate of the gross domestic product and IPD numbers from the previous calendar year quarter. For instance, every January BEA releases the first estimate, or "advance estimate," of the numbers for the preceding fourth quarter (October-December). In February, BEA releases a revised "second estimate" of the numbers for Q4, and in March BEA publishes the revised "third estimate" for Q4. In April, BEA publishes the advance estimate for Q1 (January-March), and so on.

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.

The most recent publication available on September 25 is typically the August publication, or the "second estimate" for Q2. This means that, for property tax purposes, the rate of change in the IPD is typically calculated by comparing the "second estimate" for Q2 to the revised Q2 data from the previous year.

Note that BEA uses anywhere from one to three decimal places.

Resolution or Ordinance of Substantial Need

If the IPD falls below one percent, local governments with a population of 10,000 or more may not increase their property tax levies above the rate of inflation (or bank the excess capacity) unless they adopt a resolution or ordinance of substantial need (RCW 84.55.0101).

This resolution or ordinance of substantial need is separate from the property tax levy ordinance, and separate resolutions/ordinances must be adopted for each individual levy. For instance, if the IPD falls below 1% and your county has a current expense levy, a road levy, and a conservation futures levy, and assuming you want to levy the full 1% increase for all three levies, you would need to adopt three separate substantial need findings. Likewise, if a city or a fire district has a separate EMS levy on top of its regular/general fund levy, it would need to adopt findings of substantial need for both levies.

If the local legislative body has five or more members, the resolution must be approved by a "majority plus one" supermajority for passage. If the legislative body has four members or less, it must be approved by a simple majority. The statute does not require a separate public hearing for the finding of substantial need, but presumably the substantial need finding would be established during the public hearing on revenue sources and property tax increases required by RCW 84.55.120.

Local governments with a population under 10,000 may increase their property tax levies up to 1% regardless of the latest inflation data, so they do not need to adopt a resolution or ordinance of substantial need.

Examples of Substantial Need Resolutions/Ordinances

Below are examples of resolutions and ordinances of substantial need from a variety of local governments in Washington.

General Template

• Washington Department of Revenue Example Resolution #2 (2010) – Sample language for a resolution of substantial need

City Regular/General Fund Levies

• Anacortes Resolution No. 1935 (2015) – Reasons cited include labor contracts, utility tax decrease, and depletion of general fund reserves
• Covington Resolution No. 15-13 (2015) – Reasons cited include increased costs and declining and unstable revenues from utility taxes, REET, and other sources
• Issaquah Resolution No. 2020-15 (2020) – Reasons cited include the fiscal impacts of the COVID-19 pandemic and increases in employee compensation costs
• Kirkland Resolution No. R-5167 (2015) – Reasons cited include previously adopted budget assumptions, short-term and long-term revenue losses, and addition of new firefighter position
• Lynden Resolution No. 933 (2015) – Reasons cited include 3% labor contract increases and increases in health care costs and retirement benefits

Counties - General Fund/Current Expense

• Asotin County Resolution No. 15-40 (2015) – Reasons cited include increase in maintenance and operation expenses and anticipated reductions in state funding
• Cowlitz County Resolution No. 15-098 (2015) – Reason cited is significant revenue shortfall
• San Juan County Resolution No. 37-2015 (2015) – Reason cited is service costs increases exceeding inflation

Counties - Road District/Fund

• Asotin County Resolution No. 15-41 (2015) – Reasons cited include significant capital cost increases, increases in costs of materials, and anticipated delays in state revenues
• Cowlitz County Resolution No. 15-099 (2015) – Reasons cited is expenses rising faster than inflation; provides specific percentage increases for health insurance, retirement contributions, and utility costs
• San Juan County Resolution No. 39-2015 (2015) – Reason cited is increased road costs

Counties - Flood Control

• Asotin County Resolution No. 15-42 (2015) – Reason cited is significant capital cost increases due to drainage project

Counties - Conservation Futures Fund

• Jefferson County Resolution No. 48-15 (2015) – Reason cited is service demands related to open space, agricultural, and timber lands
• San Juan County Resolution No. 38-2015 (2015) – Reasons cited include cost increases exceeding inflation, debt service requirements, and core operation requirements

EMS Levies

• Cheney Ordinance No. W-73 (2015) – Reason cited is fire department staffing needs
• Gig Harbor Fire & Medic One Resolution No. 2015-14 (2015) – Reason cited is increased operating costs for fire protection and EMS

Special Purpose Districts

• Klickitat County Port District No. 1 Resolution No. 2-2015 (2015) – Reason cited is expenses growing faster than inflation
• Spokane County Library District Resolution No. 15-07 (2015) – Reasons cited include limited revenue options, PERS contribution increases, medical insurance increases, and revenue reduction due to annexation; includes very detailed analysis
• Tukwila Pool Metropolitan Park District Resolution No. 2015-10 (2015) – Reason cited is costs increases

Current Quarterly IPD Data (Base Year 2012)

The top row of data in the following table represents the preliminary and revised implicit price deflator for personal consumption expenditures published by BEA. The second row represents the cumulative percentage change in the preliminary or revised index from the second quarter. The third row represents the actual percentage change of the IPD over the preceding 12 months.

Source: BLS National Income and Product Accounts (NIPA) Table 1.1.9: Implicit Price Deflators for Gross Domestic Product. See Line 2, Personal Consumption Expenditures. Last revised on March 25, 2021. Next release date: April 29, 2021.

Historical IPD Increases

Below are the recent historical percentage changes in the implicit price deflator for personal consumption expenditures. Red indicates when the IPD fell below 1%, affecting the ability of local governments with a population of 10,000 or more to increase their property tax levies for the following year.

Please note that these percentage changes are the official calculations used for property tax levy setting, as declared by the Washington Department of Revenue on September 25 of each year. These inflation rates are never revised and do not reflect any adjustments to the IPD that may have been made after September 25 of each year.

Source: Table B-1 for years up to 2013 and NIPA Table 1.1.9 for 2014 and beyond published by the Bureau of Economic Analysis.