Bottom Line: California income tax withholding collections this week were 27 percent below the comparable week in 2019, but this may reflect a timing issue. Total collections since late March are 0.5 percent above the comparable period in 2019.
California employers are required to make regular income tax withholding payments for their employees, which can provide a real-time indication of the direction and magnitude of the aggregate change in the employers’ payrolls. Most withholding payments are for employees’ wages and salaries, but withholding is also due on bonuses and stock options received by employees. We caution against giving too much weight to withholding numbers in any given week because a single anomalous day can result in numbers that are difficult to interpret. Nonetheless, given the pace and severity of the shift in the state’s economy resulting from the COVID-19 pandemic, tracking weekly withholding is worthwhile as a way to assess the state’s evolving economic situation.
The first graph compares withholding payments received this week to payments received in the comparable week in 2019, which ran from Monday, September 30 to Friday, October 4 of that year. Withholding was down 27 percent from the comparable week in 2019. The first few processing days of every month tend to have much higher collections than the rest of the month. Just two days this week fell in October, compared to four days of the comparable week in 2019. If the drop this week was solely due to timing, we should expect collections next week to be well above the same week in 2019.
The second graph shows total withholding collections since Monday, March 23, when we first started to see evidence of an impact of the pandemic on withholding. As shown in the graph, total collections between March 23 and October 2 are up 0.5 percent ($172 million) from the same period in 2019. Last week, the tracker showed an increase of 1.9 percent ($651 million).
The final graph shows the year over year changes in cumulative withholding for California in 2020, the United States in 2020 (from the federal income tax), and California in 2009 at the trough of the Great Recession. California’s withholding picture has improved lately, unlike federal withholding this year or the state’s own withholding at the same stage in 2009. While California’s economy has been hurt at least as badly by the recession as the national economy has, its withholding collections have likely held up better because its income tax falls more heavily on the higher-paid workers who have experienced fewer employment losses than their lower-paid counterparts. Federal withholding this week was down 39 percent from 2019, and the comparable week in California in 2009 was down 41 percent from 2008. As with the drop in state withholding this week, these declines appear to reflect timing issues.