For residents living in New Jersey and Pennsylvania who work across the state border, personal income taxes will no longer be impacted in January 2017 by New Jersey’s proposed withdrawal from the Reciprocal Personal Income Tax Agreement. On Tuesday, November 22nd, Governor Chris Christie reinstated the tax reciprocity agreement, reversing his initial decision to withdraw, which he had announced in September.
The Reciprocal Tax Agreement
For nearly 40 years, the income tax agreement has allowed both New Jersey and Pennsylvania residents working across the state border to pay income taxes in their home state. The potential change would have been significant resulting in increased income taxes for many. For example, Pennsylvania residents pay a flat 3.07% income tax while New Jersey residents pay taxes across numerous marginal income tax rates that go as high as 8.97% for the highest income earners. Middle-income earners in New Jersey working in Pennsylvania were expected to be among the worst affected as well as high income earners living in Pennsylvania working in New Jersey.
This is not the first time a withdrawal from the agreement has been proposed. In 2002, Democrat Jim McGreevey made the same proposal, but was met with criticism and opposition from New Jersey lawmakers.
Reversing the Decision to Withdraw
Gov. Christie’s intent to withdraw from the agreement announced in September was largely the result of a commitment made by the Legislature to cut $250 million in public health care costs, which had reportedly not been done resulting in a deficit. Christie stated Tuesday, however, that legislation had recently been passed by state lawmakers, helping to address the cost of health care and thereby eliminating the need to withdraw from the agreement.
Although the withdrawal was estimated to generate as much as $180 million in revenue from Pennsylvania residents, the decision was heavily criticized by residents and corporate groups, including key large employers who represent significant investments in both employment and infrastructure for New Jersey.
Although the long-term continuation of the agreement will remain in question as either side possesses the right to withdraw by simply giving 120-days written notice, for now, Tuesday’s announcement is primarily expected to be welcomed news for residents and corporate community members, particularly for approximately the 120,000 commuters living in southern and central New Jersey.
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