Since 1977, New Jersey and Pennsylvania have had a reciprocal income tax agreement on the books that ensures workers working on either side of the Delaware pay income tax only to the state in which they live.
New Jersey Governor Chris Christie announced his intention to end that pact this past Friday – giving Pennsylvania state officials the 120 days’ notice required before the new tax rules would take effect on January 1, 2017.
Currently, residents of each state file a single state tax return in the state in which they live. Once the reciprocal agreement has been nullified, those working in one state and living in the other would have to file a tax return in both states and would receive a tax credit in the state in which they reside against taxes paid to the state in which they’re working.
Because Pennsylvania residents currently enjoy a flat income tax rate of 3.07% and New Jersey has an income tax rate structure that ranges anywhere from 1.4-8.97%, depending on income level, the nearly 120,000 Pennsylvania residents (particularly high income earners) who work in New Jersey stand to owe considerably more on their income taxes come next April. Additionally, the 120,000 New Jersey residents working in Pennsylvania (primarily low and middle income earners who work in Philadelphia where a local income tax is also imposed) will also notice a change in their state income tax payments.
Christie took this measure as a means towards closing a $250 million deficit in New Jersey’s state budget which some expected to come from cuts to public employee health insurance costs. Stating that he would not “raise state taxes, cut property tax relief, reduce aid to education or [New Jersey’s] hospitals, or reduce the state’s record pension payment” to help balance the budget, he looked to the reciprocal income tax arrangement between the two states as “the least painful option.” This new measure is estimated to recoup upwards of $180 million in revenue for the state of New Jersey.
Christie stated that, should the Legislature come through with health insurance cuts for public workers in the intervening months between now and the new year, he would reconsider the decision to end the reciprocal agreement.
For information on how this may affect your income tax situation, contact your Untracht Early advisor, and watch our newsletter publications for updates on this issue.