Withholding Tax Collections in June: Clear Improvement

Posted June 27, 2020

Summary

Based on the Treasury Department’s daily reports, we estimate that withholding tax receipts in June have shown a clear move up from the amounts in May, indicating growth in economywide wages and salaries. Specifically, we estimate that withholding tax receipts were down by about 5 percent in June relative to the amount in June 2019 (that is, on a year-over-year basis), which is a significant improvement from the year-over-year decline of about 7 percent that we estimated for May (see chart below). Those measures remove the estimated effects of certain tax law changes enacted in both the CARES Act in late March and legislation with smaller effects enacted into law earlier in March; those specific tax law changes, consisting of payroll tax credits and payment deferrals, reduced withholding tax receipts but not wages and salaries. Withholding growth on that adjusted basis should more closely line up with movements in economywide wages and salaries. Without those adjustments, withholding tax collections also improved in June, down by about 9 percent for the month after registering an 11 percent decline in May. Despite the improvement, we estimate that withholding taxes have retraced less than one-fifth of their decline since the beginning of the downturn in March.

Adjusted data reflect the effect of removing from the unadjusted data the estimated effects of certain tax law changes. Year-over-year percentage growth measures the difference in the dollar amounts between the month this year and the comparable month of a year ago, divided by the dollar amount from the comparable month a year ago.

The rebound in withholding tax collections in June suggests, though with a big caveat, another strong employment report when the Bureau of Labor Statistics (BLS) releases its employment report for June on Thursday the 2nd of July. Historically, movements in withholding collections have correlated well with movements in wages and salaries reported in the monthly employment report and, more importantly perhaps, with better measures of economywide wages and salaries that are available with much longer lags. The other measures, such as from the BLS’s Quarterly Census of Employment and Wages, are based on administrative data covering nearly all employees, rather than a survey such as used for BLS’s monthly establishment report. The caveat is that withholding tax collections in May did not improve nearly as much as did the BLS’s monthly estimates of employment and wages; the withholding data suggested more of a sideways movement in economywide wages and salaries compared to the amounts in April, while the employment report had a substantial rebound. If the employment report for May was a bit ahead of actual developments–and BLS has identified the difficulties in sampling firms during the pandemic–then an improvement for June in the employment report could be more limited than what is indicated by the withholding data.

In a sidebar about the methodology used to estimate withholding growth, our estimates for a month remove as best as we can the different calendar effects, such as a month having more or fewer business days than the comparable month of the prior year. Although June isn’t quite over yet–the Treasury Department still has to collect and report withholding tax receipts for three business days–we now have our final estimates of withholding growth for the month. The amounts of withholding taxes at the very end and beginning of a month are very volatile and significantly affected by calendar timing, thereby skewing our measurement of withholding growth (see methodology). Being near the end of the month also means that we are currently in a period of about a week and a half in which we do not obtain any reliable measures of growth in withholding tax receipts, so we do not report any.