Posted on October 13, 2020
There has been a slow improvement in tax withholding since the worst of the downturn in April and May, and the improvement has continued in the first part of October. We measure that withholding was down by about 1 percent in the first part of October through Friday the 9th, compared to withholding in the same period a year ago (see chart below, the adjusted data, with the last point our measure for the first half of October). Withholding was down about 7 percent compared to year-ago amounts in April and May. The measure of tax withholding is adjusted from the actual amounts to remove the estimated effects of tax law changes enacted since March that reduce withholding but not wages and salaries–an adjustment that allows us to draw a direct connection from withholding to wages and salaries, the main determinant of withholding. The measure of withholding growth also standardizes the number and makeup of business days during the periods of comparison this year and last year (see methodology). The improvement in withholding growth in recent months is similar without the adjustment for law changes (the unadjusted data in the chart).
The adjustment to withholding to remove the estimated effects of law changes enacted since March now includes small effects from the President’s executive action to allow employers to defer withholding Social Security payroll taxes from their employees’ paychecks and remitting the amounts to the U.S. Treasury. The amounts can be deferred until the end of the year, with the deferred amounts then recaptured in increased withholding in the first four months of 2021. We’ve lowered our estimate of the effects of the deferral on withholding by almost two-thirds, compared to what we estimated last month, to a reduction in withholding of about 0.6 percentage points when fully phased in. A recent survey from the National Federation of Independent Businesses (NFIB), which advocates on behalf of smaller businesses, had fewer than 4 percent of its members planning to defer the taxes on behalf of their employees. There have also been scant reports of large businesses choosing the deferral option. So, our assumption from a month ago of a 10 percent private-sector take-up rate, which seemed pretty small at the time, looks to have been too high. Our overall adjustment to withholding still includes the 4 percentage points we have been carrying for the effects of legislation enacted in March. Therefore, we estimate that the full effect of legislation this year is currently reducing withholding by 4.6 percent. As a result, growth in withholding unadjusted for legislative effects is running roughly 4-1/2 percentage points below our adjusted figure (again, see the unadjusted data in the chart above).