Bottom Line: Thanks to a huge day on Wednesday, California income tax withholding collections this week were 27 percent above the comparable week in 2019. Total withholding since late March increased to 3.5 percent above the same period last year.
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, October 21 to Friday, October 25 of that year. Withholding was up 27 percent from the comparable week in 2019. The Wednesday figure was $1.089 billion, the single biggest withholding day in state history that did not fall in the first week of January. October 21 is typically a very large collection day, as many firms pay the withholding due for their employees’ third quarter bonuses on that date. Last year, the state collected $720 million on Monday, October 21. It is not immediately clear why Wednesday’s collections were so much higher than normal.
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 23 are up 3.5 percent ($1.365 billion) from the same period in 2019. Last week, the tracker showed an increase of 2.4 percent ($876 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 up 30 percent from 2019, due mainly to a timing issue. California withholding this week in 2009 was up 33 percent from 2008.
