Implicit Price Deflator (IPD)

What Is the Implicit Price Deflator?

The implicit price deflator for personal consumption expenditures (IPD) is one of the most widely used inflation indexes within the United States (along with the Consumer Price Index).

It measures how prices for a broad range of goods and services have changed and is calculated by the U.S. Bureau of Economic Analysis (BEA) on a quarterly basis. Every month, BEA revises its previous quarterly estimates.

How Is the IPD Used?

Local governments and the State of Washington can use the IPD in various ways, including:

• Inflationary adjustments for certain taxes, fees, and benefits—as an alternative to other indexes such as the Consumer Price Index (CPI). For more information on inflationary adjustments in general, as well as differences between the IPD and CPI, see our webpage on the Consumer Price Index (CPI-U and CPI-W).
• Property tax levy setting for local taxing districts with a population of 10,000 or more, as discussed later on this page.
• Adjusting certain state revenues, expenditures, and limitations, such as calculation of city-county assistance distributions under RCW 43.08.290 or border area fuel taxes under RCW 82.47.020.

The rest of this page focuses on the IPD's impact to local property taxes.

How Does the IPD Affect Property Taxes?

Typically, local government taxing districts can only increase their property tax levy amounts by 1% every year.

This is known as the "101% limit factor," "101% levy limit," or "101% levy lid," because it caps next year's levy at 101% of the current levy amount. (There are exceptions such as levy lid lifts, banked capacity, and tax increases due to new construction and annexations.)

However, the exact limit factor depends on each taxing district's population:

• For taxing districts with a population under 10,000: The limit factor is 101% every year. See RCW 84.55.005(2)(a).
• For taxing districts with a population of 10,000 or more: The limit factor every year is the lesser of 101% or 100% plus the IPD rate. See RCW 84.55.005(1) and (2)(c).

When Is the IPD Rate Calculated for Property Tax Purposes?

For property tax purposes, the state Department of Revenue (DOR) calculates the official IPD rate every year on September 25. See the definition of "inflation" in RCW 84.55.005(1).

DOR uses the most recent BEA data, which is usually the August publication. On or shortly after September 25, DOR sends a memo to county assessors and other stakeholders officially documenting the IPD rate for property tax purposes.

What Happens to Property Taxes if the IPD is 1% or More?

Nothing. If the IPD rate is greater than or equal to 1% as of September 25, all local governments can increase their property tax levies the full 1% next year, as usual.

A resolution/ordinance of "substantial need" (explained below) is not required.

What Happens to Property Taxes if the IPD is Less Than 1%?

If the IPD rate is less than 1% as of September 25, there might be an impact to local government budgets. However, the impacts depend on each jurisdiction's population size.

Taxing Districts Under 10,000 Population

If the IPD falls below 1%, there is no impact on taxing districts with a population under 10,000.

As discussed earlier, the "limit factor" for these smaller jurisdictions is always 101% regardless of the IPD rate, and a resolution/ordinance of "substantial need" is never required.

Taxing Districts of 10,000+ Population

If the IPD falls below 1%, taxing districts with a population of 10,000 or more might see an impact to next year's property tax revenues. As discussed earlier, the "limit factor" for these larger jurisdictions is 101% or 100% plus the IPD rate, whichever is less.

For example, if the IPD rate as of September 25 is 0.5%, the limit factor for these larger taxing districts would be 100.5% instead of the normal 101%.

In rare instances, the IPD can even be negative. For instance, if the IPD rate was -0.5% as of September 25, the limit factor would be 99.5%, which means larger taxing districts would have to reduce next year's levy amounts. (For more information, see the DOR webpage Negative Implicit Price Deflator.)

However, taxing districts with a population of 10,000 or more can voluntarily adopt a resolution/ordinance of "substantial need" (explained below) to exceed the IPD rate, up to the normal 101% limit.

How Often Does the IPD Fall Below 1%?

The IPD does not fall below 1% very often.

Below are the last 10 years of IPD data for property tax purposes. These percentages are DOR's official calculations as of September 25 each year and do not reflect any IPD data revisions BEA might have made after September 25.

Where Can I Find Current IPD Data?

To see the most recent IPD data, refer to the BEA National Income and Product Accounts (NIPA) Table 1.1.9: Implicit Price Deflators for Gross Domestic Product.

See Line 2, Personal Consumption Expenditures.

What Is a Resolution/Ordinance of Substantial Need?

If the IPD falls below 1%, taxing districts with a population of 10,000 or more may increase their levy amount above the IPD rate—up to the normal 101% limit—by voluntarily adopting a resolution or ordinance finding that there is a "substantial need." See RCW 84.55.0101.

How is "Substantial Need" Defined?

State law does not define “substantial need,” so it will depend on the financial needs of each individual jurisdiction.

Each taxing district should document evidence of its substantial need and include that evidence within the resolution/ordinance. For example, the jurisdiction might document that the cost of labor/benefits is growing faster than inflation, or that other revenue sources have decreased due to economic factors.

What is the Process for Adopting a Resolution/Ordinance of Substantial Need?

The resolution/ordinance of substantial need is separate from the property tax levy ordinance, and separate resolutions/ordinances must be adopted for each individual levy.

For example, a county would have to adopt separate resolutions/ordinances of substantial need for its current expense levy, road levy, and (if applicable) conservation futures levy. Likewise, if a city or fire district has a separate emergency medical services (EMS) levy on top of its regular/general fund levy, it would need to adopt a resolution/ordinance of substantial need for both levies.

The approval requirements depend on how many members are on the local legislative body—city council, board of commissioners, etc.

• If the legislative body has 4 members or less: The resolution or ordinance must be approved by a two-thirds majority—which, practically speaking, usually means a simple majority. For example, if a board of county commissioners has three members, a resolution of substantial need would require at least two votes in favor.
• If the legislative body has 5 or more members: The resolution or ordinance must be approved by a “majority plus one” supermajority. For example, if a city council has seven members, a resolution of substantial need would require at least five votes in favor.

The statute does not require a separate public hearing for the finding of substantial need, but presumably the taxing district would establish the substantial need during the public hearing on revenue sources and property tax increases required by RCW 84.55.120.

Can a Local Government Use a Resolution/Ordinance of Substantial Need to Bank Future Levy Capacity?

Yes. Even if a taxing district does not intend to use the full 101% levy amount next year, it can still adopt a resolution or ordinance of substantial need to bank the excess capacity and protect its future taxing potential.

Examples of Resolutions/Ordinances of Substantial Need

Below are selected examples of resolutions and ordinances of substantial need.

General

• Washington Department of Revenue Example Resolution #2 (2021) – Sample language for a resolution of substantial need

Cities/Towns

• Anacortes Resolution No. 1935 (2015) – Reasons include labor contracts, utility tax decrease, and depletion of general fund reserves
• Covington Resolution No. 15-13 (2015) – Reasons 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 include previously adopted budget assumptions, short-term and long-term revenue losses, and addition of new firefighter position
• Lynden Resolution No. 933 (2015) – Reasons include 3% labor contract increases and increases in health care costs and retirement benefits

Counties

• Asotin County:
  • Resolution No. 15-40 (2015) – General fund/current expense levy; reasons include increase in maintenance & operation expenses and anticipated reductions in state funding
  • Resolution No. 15-41 (2015) – Road levy; reasons include significant capital cost increases, increases in cost of materials, and anticipated delays in state revenues
  • Resolution No. 15-42 (2015) – Flood control levy; reasons include significant capital cost increases due to drainage project
• Cowlitz County:
  • Resolution No. 15-098 (2015) – General fund/current expense levy; reasons include significant revenue shortfall
  • Resolution No. 16-099 (2015) – Road levy; reasons include expenses rising faster than inflation. Provides specific percentage increases for health insurance, retirement contributions, and utility costs
• San Juan County Resolution No. 38-2015 (2015) – Conservation futures levy; reasons include cost increases exceeding inflation, debt service requirements, and core operation requirements

Special Purpose Districts

• Gig Harbor Fire & Medic One Resolution No. 2015-14 (2015) – EMS levy; reasons include increased operating costs for fire protection and EMS
• 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 include limited revenue options, PERS contribution increases, medical insurance increases, and revenue reduction due to annexation; includes very detailed analysis