On September 2, 2016, a spokesperson for Governor Christie advised media outlets that the requisite 120-day notice was given to end the state's reciprocal income tax agreement with Pennsylvania. (KeyStone Crossroads, 9-2-2016.)

The move comes in response to Christie's attempt to balance the state's budget, an action he says he will reconsider if the legislature takes action now to reduce public employee health insurance costs.

Should Christie not rescind his notice, the New Jersey-Pennsylvania reciprocal tax agreement will be terminated effective January 1, 2017.

Background

As we previously reported, Christie issued Executive Order 209 in June 2016 instructing the state's Treasurer and Attorney General to determine the specific steps necessary to withdraw from the Reciprocal Personal Income Tax Agreement between the state and the Commonwealth of Pennsylvania and to prepare an estimate of the effects of such move on New Jersey's tax revenue collections.

Currently, Pennsylvania residents working in New Jersey may claim exemption from New Jersey nonresident income tax withholding by giving their employers Form NJ-65, Employee's Certificate of Non-Residence in New Jersey.

When the reciprocal agreement was first enacted 39 years ago, New Jersey and Pennsylvania personal income tax rates were substantially the same; New Jersey at 2.5% compared to Pennsylvania's at 2.0%. Today, the gap in the income tax rates is are far more substantial, New Jersey now having a tax rate of 8.97% compared to Pennsylvania' 3.07%. Some estimate that the loss in New Jersey nonresident income tax revenues from Pennsylvania residents working in the state is as high as $180 million. (NJSpotlight, July 18, 2016.)

Under New Jersey's constitution, the governor can withdraw from the reciprocal agreement through the issuance of an executive order; it does not require approval of the state's legislature.

Implications

If the reciprocal agreement ends, Pennsylvania residents who work in New Jersey will have to start paying taxes to New Jersey, which may exceed the amount of tax they are currently paying to Pennsylvania.

———————————————

———————————————