October 14, 2016
New Jersey Set to End Personal Income Tax "Reciprocity" with Pennsylvania
New Jersey Governor, Chris Christie, announced that he will end an agreement between New Jersey and Pennsylvania that allows commuters to pay state income tax only to the state where they live, instead of paying tax to the state where they work.
In an effort to balance the state's budget and account for what he described as a "$250 million state budget hole" created by the State Legislature regarding proposed, yet potentially unattainable, public employee health insurance savings, Governor Christie stated he will unilaterally end New Jersey's participation in the state income tax reciprocity agreement with Pennsylvania, effective January 1, 2017.
Ending the agreement (originally implemented in 1977) will impact thousands of employees and employers. It is estimated that nearly 250,000 workers in both states will take on the added burden of filing income tax returns in both states. While Pennsylvania has a low, flat personal income tax rate of 3.07 percent, New Jersey's income tax rates range from 1.40 percent, for taxable incomes under $20,000, to 8.97 percent for taxable incomes over $500,000; nearly triple Pennsylvania's rate. Governor Christie's action is designed to raise state revenue while not requiring the raising of state tax rates, the elimination of property tax relief, the reduction of state aid to education and hospitals, or reduction of the state's scheduled pension payments. Christie expressed a willingness to revise these plans, however, if New Jersey lawmakers take action to reduce health care costs.
Pennsylvania Governor, Tom Wolf, has urged Governor Christie to reverse his decision, citing both states' mutual interest in creating jobs and economic opportunities in the region, and in defense of Pennsylvania commuters who will suffer higher tax burdens as a result of New Jersey's political budget debate. Additionally, the Pennsylvania Department of Revenue estimates a $5 million revenue loss for the commonwealth as a result of the change.
Employees and individuals will not be the only parties affected; employers will need to modify their payroll withholding processes.
If you, your employees or your business will be effected by this potential new process, contact your Marcum LLP State and Local Tax Professional with any questions.