November 16, 2022
Personal Income Tax (PIT) Withholding. California employers make regular income tax withholding payments for their employees. These amounts are reported every weekday, providing a real-time indication of the direction and magnitude of aggregate change in the employers’ payroll. Most withholding payments are for employees’ wages and salaries. However, income tax withholding also is due on salary bonuses and stock options employees receive.
PIT Withholding Down from Last Year. The graph below compares the running total of PIT withholding payments since the start of the 2022-23 fiscal year relative to the same period last year. To-date, personal income tax withholding is $575 million lower (2.2 percent) than last year. The main driver of withholding each year is statewide employment and wages. That is, when employment and wages increase, income tax withholding also tends to increase (and vice versa). With annual job growth of 4.2 percent (as of September) and similar wage growth, we would expect to see much stronger withholding growth so far this year.
Based on Recent Job Growth Alone, Would Expect Strong Growth in PIT Withholding. Based on the historical relationship between job growth and income tax withholding, we would expect income tax withholding to be 15 percent higher than last year. (At this point last year, tax withholding was up 23 percent above the prior year.) However, as shown in the figure below, income tax withholding is far below the historical relationship between withholding and job growth. The figure also highlights several other similarly off-trend years, all of which occurred following significant stock market declines.
Why Is Withholding Underperforming Relative to the Job Market? As noted above, income tax withholding also is due on bonuses and stock options employees receive. Below we present evidence suggesting that these sources of withholding have dropped sharply in recent months.
While the typical share of withholding collections on bonuses and stock options is unknown, these types of incomes likely contributed to strong tax withholding growth in 2021. With those sources of income likely declining significantly, California is seeing lower withholding collections despite relatively strong employment and salary growth.