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Christie Reverses Course, Keeps Reciprocal Income-Tax Agreement with Pennsylvania

No new taxes! South Jersey residents and businesses get a reprieve from governor who changed his mind about ending income-tax accord with Pennsylvania

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When Gov. Chris Christie announced earlier this year amid a budget feud with state lawmakers that he was going to end New Jersey’s longstanding reciprocal income-tax agreement with Pennsylvania, it meant thousands of commuters in South Jersey would be facing a tax hike in 2017.

The governor’s decision also rattled the leaders of several big companies like Camden-based Subaru that have taken advantage of state tax incentives in recent years to either stay in New Jersey or relocate here.

They all got an early Christmas present from Christie yesterday as he announced that he’s now decided to keep the bistate pact in place, thanks in large part to legislation he recently signed that’s projected to save taxpayers here an estimated $200 million in 2017.

Christie’s reversal means residents of New Jersey and Pennsylvania who travel to jobs across the Delaware River will be able to continue filing their income taxes where they live instead of where they work, a convenience that the reciprocal-tax agreement has been providing them for nearly four decades.

More importantly, leaving the bistate deal in place also preserves tax benefits enjoyed by thousands of low-income commuters from New Jersey — and also well-paid executives from Pennsylvania — thanks to big differences in the way the two states levy taxes on personal income. Christie’s announcement also brings to an end this year’s lengthy tussle with Democratic legislative leaders and public-employee unions over healthcare costs, a flap that was oddly linked to the bistate tax agreement by Christie himself earlier this year.

Lawmakers and business leaders in South Jersey who’ve been lobbying Christie to retain the reciprocal agreement praised his reversal yesterday. It was also lauded by advocates for low-income workers, and the administration of Gov. Tom Wolf in Pennsylvania.

Since 1977, 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.

Differences in the tax rates levied on personal income by New Jersey and Pennsylvania have also provided tax benefits to commuters in both states, depending on their income brackets. New Jersey has graduated tax rates that rise with income, while Pennsylvanians pay a flat 3.07 percent. That’s allowed lower-income commuters from New Jersey to pay lower taxes under the bistate deal. New Jersey taxpayers also receive credits for any wage taxes they pay to cities like Philadelphia.

Meanwhile, higher-income commuters from Pennsylvania enjoy benefits as well under the reciprocal agreement. That’s because New Jersey taxes earnings over $500,000 at a rate of 8.97 percent, compared to the 3.07 percent that well-paid executives who work here but live in Pennsylvania have to pay. New Jersey’s 6.37 percent tax rate on incomes between $75,000 and $500,000 is also much higher than Pennsylvania’s flat rate.

Christie, a second-term Republican, first put the bistate tax deal in the crosshairs at the end of June at the same time he enacted a new state budget. His dispute with Democratic legislative leaders was rooted in Christie’s decision to build this year’s budget with an assumed $250 million in savings from changes to public-employee healthcare plans that the governor himself had no power to enact.

After legislative leaders initially failed to force the changes Christie wanted, the governor then moved ahead with his plan to help fill the budget gap by ditching the reciprocal agreement, which costs the state budget an estimated $180 million annually to keep in place.

Christie formally announced in September that the deal would not be continuing in 2017, and he also gave official notice of the change to Wolf’s administration in Pennsylvania. A recent state bond offering also outlined how the tax-policy change was expected to boost state tax collections.

But some progress was made toward realizing the healthcare savings during the summer, and earlier this week, Christie signed bipartisan legislation to jumpstart the search for the state’s next pharmacy benefits manager, and to also allow for a reverse auction to drive down the cost of prescription drugs. The savings from that measure are estimated to be roughly $200 million, though some of that money would also go to local governments and schools. Still, it will provide the state with enough revenue — in addition to the savings already achieved during the summer — to allow Christie to reverse the decision to restore the reciprocal agreement, he announced yesterday.

“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,” Christie said in the announcement.

Senate President Steve Sweeney (D-Gloucester) had opposed Christie’s initial decision to scrap the reciprocal agreement ever since the governor first floated the idea at the end of June. Yesterday he held an event with other lawmakers and business leaders from South Jersey, calling Christie’s reversal “a tremendous victory.”

“I’m proud that we were able to work this out,” Sweeney said in a later interview with NJ Spotlight. “It would have been an enormous hardship, the dollars coming out of the economy,” he said. “I feel that at the end of the day this was a good outcome.”

While the state could have used the revenue that scrapping the tax deal would have generated, Jon Whiten, vice president of New Jersey Policy Perspective, a liberal think tank based in Trenton, said the impact on the state’s working-class would have been too high.

“State finances must also be viewed with fairness in mind, and on that front, there are plenty of fairer ways to raise revenues — particularly when New Jerseyans at the bottom and in the middle already pay the highest share of their incomes to state and local taxes," Whiten said.

In Pennsylvania, state officials had already begun to warn taxpayers of what they expected would be a permanent policy change. Ending the bistate tax agreement was also expected to generate a net loss for Pennsylvania’s budget.

“We are pleased that Governor Christie has changed his mind about ending an arrangement that would have punished 125,000 Pennsylvanians working in New Jersey and cost the commonwealth approximately $5 million,” said Pennsylvania Secretary of Revenue Eileen McNulty. “For nearly 40 years this agreement has been in the mutual interest of creating jobs and opportunities in the region.”

“We empathize with Pennsylvania employers and payroll companies that have been preparing for this change in policy and we regret the time and resources spent in order to be in compliance,” she said.

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