Withholding taxes show impact of Nebraskans still out of work

It is no secret there are economic consequences to the COVID-19 pandemic, but some figures might be misleading policymakers and people’s perception of state revenues and the economy.

While Nebraska is weathering the pandemic’s economic storm relatively better than many states, there is still reason to pause when looking at the revenue numbers.

The federal CARES Act legislation created a $600 weekly federal supplement to state unemployment benefits that expired in July. I know plenty of people who filed for unemployment, were denied by the state, or received minimal payments from the state, but still got the $600 per week. They were ecstatic because many were making more on unemployment then they would have at their regular job.

The thing to remember is – this money is taxable. According to reports from tax administrators, states are seeing higher than expected withholding nationwide, including in Nebraska.

What is withholding? It is the amount that is taken out of your paycheck by your employer and sent directly to the government as a partial payment of income tax. It is calculated based on the amount of income earned. So, the more that is earned, the more that will be withheld.

I asked the Department of Revenue for data on Nebraska’s withholding amounts and this is what I was sent:

You can see from the data that withholding amounts are up from 2019 figures in every month except for May (which was very close). In the early months of 2020, Nebraska had very low unemployment (2.9%) and the state was experiencing economic growth. However, when unemployment went to 4% in March, and then jumped to historic levels in April (8.7%), the state’s withholding did not suffer like it would during a typical recession where there is widespread unemployment. Under normal circumstances, people do not collect more money on unemployment than they would if they were working.

This withholding anomaly means lawmakers and the state of Nebraska should expect to see higher than expected income tax revenues in April 2021, especially since President Trump just signed an executive order for an extra $400 per week to take effect after the CARES Act payments expired.

People are paying income taxes on these extra unemployment benefits, which is going to skew the tax collections, and as a result, skew people’s perception of the health of the state’s economy during the pandemic.

However, if enough of these people do not get their jobs back or businesses close indefinitely, then we will see lower tax collections in April 2022. That is because the supplemental unemployment benefit will no longer be in effect, and people will still be without work, or they may have taken a job that was not as well-paying as the one they lost.

The bottom line is that current tax revenues are not as clear cut as they are under normal economic circumstances and nobody should jump to conclusions before looking at the entire picture.