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Christie Threatens to End Reciprocal Income Tax Agreement with Pennsylvania

Pact currently allows bistate commuters to file where they live and means lower taxes for low-income New Jerseyans and high-income Pennsylvanians

Ben Franklin Bridge
The Ben Franklin Bridge between Camden and Philadelphia.

For nearly four decades New Jersey has maintained a reciprocal tax-collection agreement with neighboring Pennsylvania that has made it much easier for residents of both states to file their income-tax returns. But now, Gov. Chris Christie is considering ending the deal and not because bistate relations have soured.

Instead, Christie’s put the tax-collection agreement on the chopping block amid an ongoing feud with Democratic legislative leaders and public-worker unions over cutting New Jersey’s spending on public-employee health benefits.

An executive order Christie issued along with a new state budget at the end of June impounds some funding for distressed cities and special legislative grants until his administration and union officials agree on how to find $250 million in healthcare savings. The executive order also orders administration officials to determine how New Jersey can get out of the tax deal with Pennsylvania because doing so could end up bringing in at least $180 million for New Jersey’s budget, largely due to the higher tax rates levied on this side of the river.

A final decision has yet to be made, but just the threat has upset lawmakers in South Jersey, where thousands of low- and middle-income residents who work in Philadelphia could end up paying more because of other differences in the ways the two states levy income taxes.

New Jersey entered into a reciprocal agreement with Pennsylvania in the late 1970s. Since then, residents of New Jersey who work across the Delaware River pay their income taxes where they live instead of where they earn their paychecks with Pennsylvanians doing the same.

New Jersey has no reciprocal agreement with New York, forcing those who commute between the two states to file income-tax returns in both.

Pennsylvania has a flat 3.07 percent income tax rate, so the agreement benefits low-income New Jerseyans who pay lower rates here.

Barry Kleiman, a certified public accountant and principal with the Florham Park-based firm Untracht Early, suggested residents of Pennsylvania who make hefty salaries at a jobs in New Jersey have much to be concerned about. If the deal is scrapped they would have to pay income taxes in New Jersey, where the top-end rate is 8.97 percent, far higher than Pennsylvania’s rate.

“There would be a bigger impact on the people living in Pennsylvania but working in New Jersey,” Kleiman said.

New Jersey also offers a tax credit to residents who work in towns in Pennsylvania like Philadelphia that levy a local income tax. So getting rid of the reciprocal agreement would mean thousands of South Jersey residents who hold low- and middle-income jobs in Philadelphia would get hit with a higher net income-tax bill.

When former New Jersey Gov. Jim McGreevey considered ending the bistate agreement in 2002, the nonpartisan New Jersey Office of Legislative Services determined the average New Jersey resident working in Philadelphia and earning $50,000 annually would end up paying about $1,040 more in annual income taxes. McGreevey ultimately ditched the idea after it was heavily criticized by both Democratic and Republican lawmakers.

But thanks to those wealthier Pennsylvania residents who work in New Jersey, scrapping the deal would also likely leave New Jersey’s budget with a net gain in revenue. In fact, McGreevey considered doing so as his administration was facing a sizable budget hole.

Last year, former state Treasurer Andrew Sidamon-Eristoff wrote in by NJ Spotlight that ending the agreement could bring in as much as $180 million in new revenue. (Sidamon-Eristoff is a regular contributor to NJ Spotlight.)

“That won’t solve all our funding needs, but $180 million is real money,” Sidamon-Eristoff wrote.

Creating a similar pact with New York, meanwhile, could generate as much as $2 billion for New Jersey, the former treasurer estimated.

In his original budget proposal, Christie called on members of special committees that draw up the healthcare plans for teachers and other public workers to find ways to save a total of $250 million.

But so far those committees, whose members include equal representation from both unions and the administration, have been unable to agree on ways to find the $250 million. Democratic legislative leaders also upset Christie when they sent him a budget bill at the end of June that did not include forceful language to mandate the savings.

So to up the stakes, Christie baked the $250 million total into the final budget. He also issued a strongly worded executive order that said he is holding back some funding for distressed cities and grants inserted by lawmakers for things like cancer research and prisoner reentry programs until the plan-design committees agree on savings.

The same order includes language instructing the state treasurer and attorney general to look at the “specific steps” that would have to be taken to end the reciprocal agreement with Pennsylvania. The deal can be scrapped at the start of any calendar year as long as the governor seeking to do so gives the other state 120 days notice.

Brian Murray, Christie’s press secretary, referred to the executive order when asked about the issue on Friday, calling it “an overall action regarding that reckless budget proposal pitched to the governor by the legislature.”

But Senate President Steve Sweeney (D-Gloucester) said while speaking to reporters in the State House last week that it’s Christie who would be acting irresponsibly if he ends up deciding to scrap the reciprocal agreement.

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