The change will reap tens of millions of dollars for New Jersey, but But low- and middle-income New Jerseyan working in Philadelphia.
TRENTON -- Gov. Chris Christie's administration announced Friday it has notified Pennsylvania that the state is pulling out of a 38-year-old agreement that allows New Jersey and Pennsylvania residents who work across the river to pay income taxes where they live.
The tax change will reap tens of millions of dollars for New Jersey, but comes at a cost for some residents of both states who will get socked with higher income taxes.
The governor was required to give Pennsylvania 120 days notice in order to withdraw from the agreement by Jan. 1, the beginning of the next tax year. Christie directed New Jersey state officials to begin exploring the consequences of withdrawing from the tax pact at the end of June. He can take the action without Legislative approval.
He said in a statement Friday that the state's financial situation necessitated the change.
Christie unfreezes funds after health care cuts
"Today's action was made necessary by the Legislature irresponsibly creating a $250 million state budget hole in June," Christie said. "I will not raise state taxes, cut property tax relief, reduce aid to education or our hospitals, or reduce the state's record pension payment to cover for this blunder by the Legislature."
"I am left with the least painful option I have to fulfill my constitutional duty to balance the budget for New Jersey taxpayers," he continued.
The budget passed by the Legislature assumed the state would come up with $250 million in cuts to public worker health care but did not identify those savings or mandate them.
Christie, however, has tied a spending freeze to the cuts, saying he won't release the funds until the $250 million is paid in full. He said Friday he will reconsider his decision to withdraw from the tax agreement with Pennsylvania if the Legislature makes good on the cuts.
Currently, New Jersey doesn't collect income taxes from people living in Pennsylvania and working in New Jersey. Christie's former treasurer has estimated the Garden State would reap $180 million in revenue from Pennsylvania residents forced to pay taxes here.
Under the reciprocal agreement, a resident of New Jersey who works in Pennsylvania need only file a tax return in New Jersey. The same is true for a Pennsylvania resident working in New Jersey.
Scrapping the deal means either resident would have to file two tax returns and claim a credit against taxes owed where they live for taxes paid in the state where they work.
Higher income Pennsylvania residents working in New Jersey are likely to pay much more. That state has a flat 3.07 percent income tax rate, while New Jersey's graduated income tax tops out at 8.97 percent. A highly paid executive living in Pennsylvania but working in New Jersey now can pay Pennsylvania's 3.07 percent flat tax. But an end to the reciprocal agreement means they'd have to pay New Jersey taxes, experts say.
But low- and middle-income New Jerseyan working in Philadelphia and other spots in the Keystone State would owe more.
The pullout comes 12 years after former Gov. James E. McGreevey proposed to end the reciprocal tax agreement but dropped the plan after angering south Jersey residents and lawmakers who said many New Jerseyans who worked in Pennsylvania would have paid more in taxes.
A legislative analysis at the time found that it would cost a New Jersey resident who earns $75,000 a year working in Philadelphia hundreds of dollars more a year in taxes.
In a column in NJ Spotlight last year, former Treasurer Andrew Sidamon-Eristoff predicted ending the arrangement would bring $180 million into the state.
"New Jersey's losses from not being able to tax wealthy Bucks County residents who commute to high-paying jobs in New Jersey far outweighs the taxes New Jersey collects on low- and moderate-income Camden and Gloucester County residents who work in Pennsylvania, typically Philadelphia," he wrote.
Samantha Marcus may be reached at smarcus@njadvancemedia.com. Follow her on Twitter @samanthamarcus. Find NJ.com Politics on Facebook.