Christmas came early for some taxpayers in New Jersey and Pennsylvania this year: New Jersey Governor Chris Christie (R) has announced that he will not end the income tax reciprocity agreement with Pennsylvania.
Earlier this year, Governor Christie announced that he would end the 38-year-old agreement with the Keystone State that allows New Jersey and Pennsylvania residents to pay income taxes where they live.
Under current law, New Jersey doesn’t collect income taxes from people living in Pennsylvania and working in New Jersey. And, in return, Pennsylvania doesn’t collect income taxes from people living in New Jersey and working in Pennsylvania (largely, Philadelphia). Instead, Pennsylvania residents report and pay tax on income earned in New Jersey on a Pennsylvania tax return; similarly, New Jersey residents report and pay tax on income earned in Pennsylvania on a New Jersey tax return.
If the agreement had been nixed, higher income Pennsylvania residents who work in New Jersey would have seen a higher tax bill. Pennsylvania’s income tax rate is a flat 3.07% while New Jersey has a graduated income tax which can hit as high as 8.97%. On the flip side, lower to middle-income New Jersey residents who work in Pennsylvania would have also paid more since tax rates in New Jersey start at a low 1.4%, about half of Pennsylvania’s flat rate.
The tax agreement allows for either state to unilaterally withdraw by providing 120 days’ written notice prior to January 1 of the tax year. That means that Christie’s initial decision did not require approval from the New Jersey Legislature. Christie blamed the legislature for the action in the first place, saying, in part, that it “was made necessary by the legislature irresponsibly creating a $250 million state budget hole in June.”
However, according to the Governor’s website, health benefit reforms enacted since the most recent (FY17) budget passed will bring in extra dollars. That means that cutting ties with Pennsylvania won’t be necessary after all.
The Governor said, about the move:
This action will save State taxpayers hundreds of millions of dollars in health care benefit costs, and I’m proud my administration was again able to work with elected officials from both sides of the aisle and many labor union representatives to achieve these savings. By addressing a potential $250 million budget deficit from growing healthcare costs, we are now able to save an income tax reciprocity agreement with Pennsylvania that protects tens of thousands of hard working New Jerseyans from having to pay more income taxes.
A spokesperson for Governor Tom Wolf (D) of Pennsylvania released the following statement in response:
Governor Wolf is pleased that Governor Christie has decided not to end an arrangement that would have punished 125,000 Pennsylvanians working in New Jersey and cost the commonwealth approximately $5 million. This agreement has always been in the mutual interest of creating jobs and opportunities in the region. The governor empathizes with Pennsylvania employers and payroll companies that have spent time and resources to comply.
