Christie Triggers Potential End to Income Tax Agreement With Pennsylvania

Allowing bistate commuters to pay income taxes where they live saves money for many in New Jersey, but governor says it’s hurting state’s bottom line

Credit: Governor's Office/Tim Larsen
Gov. Chris Christie has upped the stakes in his ongoing feud with Democratic legislative leaders over the growing cost of public-employee health benefits by triggering the end of a longstanding tax agreement with Pennsylvania.

The move will force those who commute across the Delaware River to pay income taxes where they earn a paycheck instead of where they live, a change that will generate more cash for New Jersey’s budget but also stick many South Jersey commuters with a heftier income-tax bill. Higher-income Pennsylvania commuters will also end up paying more in taxes due to differences in the two states’ income-tax rates.

The tax-policy shift was announced by Christie’s office late last week, but the Republican governor spoke about it publicly for the first time yesterday. He said New Jersey lawmakers left him no choice but to scrap the bistate tax deal because they’ve refused to give him the authority to force public-employee union officials to accept cost-cutting healthcare changes. The state budget banks on a total of $250 million in employee-healthcare savings, but, without the power to mandate the cuts, Christie said he now needs to find savings elsewhere to keep spending balanced.

Democratic legislative leaders, including Senate President Stephen Sweeney, whose district in Gloucester County could be among those hit hardest by the tax-policy shift, continued to point the finger directly at Christie yesterday. They said the governor’s own budget proposal included the $250 million reduction in employee-healthcare spending without identifying any specific items to cut, and they also said Christie has refused to negotiate directly with union leaders over an equitable way to enact changes.
Meanwhile, a spokesman for Pennsylvania’s Democratic governor, Tom Wolf, is also criticizing Christie, saying ending the tax deal will impact the two states’ mutual economic interests and force Pennsylvania residents to pay the price for New Jersey’s partisan dispute.

New Jersey first entered into the reciprocal agreement with Pennsylvania in the late 1970s, allowing residents of both states who work across the river to pay their income taxes where they live. By contrast, New Jersey residents who work in New York are required to pay their income taxes in there because the two states don’t have a similar tax deal.

While New Jersey has graduated income-tax rates that rise with income, Pennsylvanians pay a flat 3 percent. That 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. High-income commuters from Pennsylvania stand to take a hit as well after the change goes into effect because New Jersey taxes earnings over $500,000 at a rate of 8.97 percent.

“You’re going to have winners and losers,” said Ralph Albert Thomas, executive director and chief officer of the New Jersey Society of Certified Public Accountants. “It just depends on where people are positioned.”

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

“That won’t solve all our funding needs, but $180 million is real money,” said Sidamon-Eristoff, who is a regular contributor to NJ Spotlight.

He also argued that, in addition to raising more cash, the change would level the playing field by taking away a benefit enjoyed by New Jersey residents who work in Philadelphia but not those who work in New York City.

Christie first announced that he was looking into ending the tax deal at the end of June in an executive order that was issued along with the $34.5 billion budget for the 2017 fiscal year. The deal between the two states allows either side to break away at the beginning of any tax year as long as 120 days of notice is provided. Christie’s office announced on Friday that New Jersey was giving notice to Pennsylvania amid the dispute with lawmakers over healthcare costs.

But Christie suggested yesterday that he’s still open to reversing his decision and would be able to strike a new deal with Pennsylvania, saying it all depends on the Democratic legislative leaders.

“The only reason I’m doing that is because I have to, I have to come up with a balanced budget,” Christie told reporters following a bill-signing event in Caldwell.

It seems unlikely, however, that the legislative leaders are going to back down. Though a committee that sets healthcare policy for state and local government workers agreed to some reforms last week that will save an estimated $60 million, a similar panel for teachers has yet to consider any changes.

Sweeney said during an interview with NJ Spotlight yesterday that there are places to find savings, including prescription-drug plans, if Christie is willing to negotiate with union leaders.

“There is no reason why they can’t sit down (and negotiate),” Sweeney said. “No one is going to give the governor carte blanche.”

And he said Christie will be solely responsible for any increase in taxes for New Jersey residents, including those in his own district in South Jersey, that will result from an ending of the bi-state tax deal.

“He’s the one who says he doesn’t raise taxes,” Sweeney said of Christie. “My signature is not on that letter to Gov. Wolf, it’s his signature.”

Assembly Speaker Vince Prieto (D-Hudson) said in a statement that Christie is trying to blame the Legislature for his own “dereliction of duty” on the employee-healthcare issue, asking, “When will he accept responsibility for his own failures and stop casting the blame and foisting the burden on others?”

Across the river, Jeff Sheridan, a spokesman for Wolf, said Christie has “erred significantly” in moving to end the tax deal.

“Governor Wolf continues to hope that Governor Christie will change his mind and reverse his decision,” Sheridan said. “Unfortunately, it seems that Governor Christie is committed to making Pennsylvania and our residents working in New Jersey suffer the consequences of his failure to enact a responsible budget in a bipartisan way.”