New Jersey’s tax reciprocity with Pennsylvania to end Dec 31

New Jersey Gov. Chris Christie said over the summer that he wasn’t fully committed to his decision to scrap a longstanding tax agreement with the state of Pennsylvania that has allowed commuters in both states to pay personal income taxes where they live instead of where they work.

But with the start of the next tax year now getting closer, it’s looking more and more like the bistate pact will indeed be allowed to expire.

Across the river in Pennsylvania, state officials have already begun informing taxpayers that the arrangement with New Jersey, which has been in place for nearly 40 years, will be coming to an end as of December 31, 2016. The change is important because New Jersey and Pennsylvania have different income-tax rates, and some commuters on each side of the river will end up facing higher income-tax bills.

Officials in New Jersey, meanwhile, have also indicated in documents released for an upcoming public bond offering that the state is now counting on collecting an extra $72 million this fiscal year thanks to the canceling of the reciprocal agreement with Pennsylvania. The change is a net winner for New Jersey’s budget because income-tax rates are higher for most of the tax brackets on this side of the river than in Pennsylvania, where the state levies a flat 3.07 percent rate.

While some lawmakers in both states have cried foul over the pending change since it was announced by Christie in September, they don’t have the power to block it thanks to the way the bistate deal was originally enacted. Even Pennsylvania Gov. Tom Wolf, who has also criticized Christie’s decision, doesn’t have the authority to stand in the way.

The Republican Christie originally put the longstanding tax pact on the chopping block at the end of June as he was waging a partisan fight with Democratic legislative leaders over changes he wanted to make to public-employee and retiree healthcare plans. He said those unspecified healthcare changes were necessary to help cut $250 million in state spending.

But after the Democrats refused to force any changes through legislation or the annual state budget process, Christie through a strongly worded executive orderimpounded some discretionary spending and also instructed his administration to look into the specific steps that need to be taken to end the reciprocal agreement with Pennsylvania.

Some progress has since been made with public-worker union officials on finding ways to save the $250 million that’s been in dispute over the past several months, allowing for some of the impounded spending to be released. But even though Christie previously said he’d be willing to change his mind on the bistate tax agreement if there was progress on the healthcare issue, a spokesman yesterday confirmed that nothing has changed on its status since the governor informed Wolf that New Jersey would be pulling out come December 31.

The tax deal has made it easier for commuters in each state to file their annual income-tax returns because they’ve generally only been required to submit tax forms to the state in which they live. By contrast, New Jersey residents who work in New York are required to pay their income taxes to New York, while also submitting tax forms to Trenton, because the two states don’t have a similar deal.

But New Jersey’s agreement with Pennsylvania has also had more significant consequences for commuters in each state than more convenient income-tax filing. That’s because New Jersey has graduated income-tax rates that rise with income, while Pennsylvanians pay a flat 3 percent.

The difference in the tax rates generally allows commuters in lower-income brackets in New Jersey to save money, and they also receive a credit for local-wage taxes levied by Philadelphia and some other Pennsylvania cities. But high-income commuters from Pennsylvania have benefited from the reciprocal agreement since New Jersey taxes earnings over $500,000 at a rate of 8.97 percent.

Overall, as former state Treasurer Andrew Sidamon-Eristoff wrote last year in NJ Spotlight, New Jersey has far more to gain by taxing high-income commuters from Pennsylvania than it could lose from its own low-income commuters. He estimated the change would generate as much as $180 million in new revenue for state coffers over a full year.

Sidamon-Eristoff’s estimate was confirmed in documents released last week in advance of a planned sale of $137 million in state bonds to pay for higher-educational facility capital improvements. The state also disclosed in the bond documents that it plans to generate $72 million during the current fiscal year, which ends June 30, 2017, as a result of the change.

Despite that net gain, not everyone in New Jersey has been happy about the bistate agreement coming to an end. Senate President Stephen Sweeney (D-Gloucester) and other lawmakers in the southern part of the state have called on Christie to reverse course, estimating as many as 100,000 New Jersey taxpayers, including many in communities located close to Philadelphia, will take a hit.

Pennsylvania state Rep. Steve Santarsiero (D-Bucks County) is collecting signatures from those on his side of the river who oppose ending the tax deal. He’s also sponsoring legislation that calls on Christie to reconsider, though it doesn’t have the authority to block the change because the deal was constructed in a way that allows either state to end it simply by giving the other 120 days notice.

Meanwhile, the Pennsylvania Department of Revenue has been distributing fliers to make sure residents and commuters alike are aware of the new income-tax policy that will be in place for the 2017 tax year.

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NJ Spotlight, an independent online news service on issues critical to New Jersey, makes its in-depth reporting available to NewsWorks.