Posted on May 31, 2023
We estimate that federal tax withholding–the amount of income and payroll taxes withheld from employees’ paychecks and remitted daily to the U.S. Treasury–grew by 5.6 percent in May (compared to the amounts from May of a year ago). That is the highest rate of growth since October 2022, and is at the top end of the range of 2 percent to 6 percent growth recorded since May of a year ago (see the chart below). Tax withholding tends to move with wages and salaries in the overall economy, and it remains to be seen whether that move up in withholding in May indicates a move up in wages and salaries or is a temporary movement in withholding and is independent of wages and salaries. Our measure adjusts the actual amounts of daily withholding to remove the estimated effects of tax law changes (with no such adjustments needed this year) and to standardize the calendar across months, but other factors independent of wages and salaries can still affect tax withholding.
In addition, last week there was a downward revision in economywide wages and salaries as measured by the Bureau of Economic Analysis (BEA) in the monthly GDP accounts, bringing wage and salary growth in recent months closer to tax withholding growth (again, see the chart below). For most of the past year, withholding growth has been well below that of economywide wage and salary growth, leading us to speculate that either the BEA wage and salary data would be revised down when better data became available or that distributional shifts in wages and salaries–in which lower-wage workers, who face lower income tax rates, experienced relatively faster wage growth–were reducing withholding growth below that of wages and salaries. It is starting to appear that both of those factors may have been at work. Wage growth for the period from November 2022 to March of this year now measures 5.7 percent (again, compared to the same period of the prior year), after measuring 7.3 percent before last week’s revisions. The substantial downward revision has closed a significant portion of the previous wage-withholding growth gap in recent months. And withholding growth in May was very near that updated rate of wage and salary growth, but we need to see if the move up in withholding persists. Withholding growth moved abruptly down in May of a year ago, and the move up in May of this year could stem at least in part from the unwinding of some unidentified factor that lowered withholding a year ago.
