Income Tax Pact Dismantled: Gov. Christie Terminates Tax Covenant with PA

By Philip London

Do you cross the Delaware River on the way to work? By next year, your commute will be even more expensive. For the past 38 years, neighbor states Pennsylvania and New Jersey have preserved a reciprocity pact that allows taxing solely where workers reside, not where they work. Thus, NJ does not collect tax on PA residents working in New Jersey, and vice versa.

However, last week, Governor Christie withdrew from the tax agreement. Consequently, roughly a quarter-million commuters from New Jersey and Pennsylvania could see an immense transformation in how they pay their income taxes. To stay informed with the change, here are some key consequences of the announcement:

• Filing of tax returns is now mandatory. Those working in one state but residing in the other are now required to file tax returns in both states—something not currently required.
• Credit claim disappears. New Jersey inhabitants employed in Philadelphia won’t be able to claim a credit for paying the city’s wage tax, which is 3.47 percent for nonresidents. Though claiming such a credit is permitted under New Jersey law, Pennsylvania does not allow for the credit.
• There’s winners and losers on both sides. Since the New Jersey tax rate is substantially higher than PA’s, NJ residents will see very little or no tax hike, while PA residents will see a larger increase. Nearly 125,000 Pennsylvania residents commute to New Jersey, and an additional 125,000 make the reverse voyage.
• Plugging the state’s budget hole. Christie believes backing out of the agreement is necessary based on the $250 million state budget hole this past June. “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” he stated.  “I am left with the least painful option I have to fulfill my constitutional duty to balance the budget for New Jersey taxpayers.”

Keep in mind–this action will not affect NJ residents working in other states across the country since PA is the only state with reciprocity. Accordingly, the Garden State will rake in approximately $180 million in revenue from Pennsylvania residents forced to pay taxes here.

Phil London is a Partner in the Tax Services Group at Wiss. Phil is an expert in federal, state and local business incentive tax credits. Reach him at plondon@wiss.visioncreativegroup.com or 212.594.8155.

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