Repeal of NJ-PA Reciprocal Agreement


By Neil Becourtney, CPA
CohnReznick LLP

Since 1977, New Jersey and Pennsylvania have had a reciprocal income tax agreement in place whereby wage income earned by a resident of either state who worked in the other state was not subject to nonresident income tax, and the employer was required to withhold home state income tax. So, a New Jersey resident working in Pennsylvania would not be subject to PA tax on their wages, and the PA employer would withhold NJ income tax. Likewise, a PA resident working in New Jersey would not be subject to NJ taxes on their wages, and the NJ employer would withhold PA income tax.

On September 2, Governor Christie announced that he was ending the reciprocal tax agreement effective for 2017. It has been estimated that the Garden State will reap $180 million in annual revenue as a result of the reciprocal agreement being terminated. This is due to the fact that high wage earners who reside in PA but work in New Jersey will become subject to New Jersey income taxes with a top rate of 8.97% imposed on income above $500,000. The PA personal income tax is imposed at a flat rate of 3.07% at all income levels.

Each state has approximately 120,000 residents who cross the Delaware River to work in the other state. Some lower income New Jersey residents will see their state income taxes rise as a result of the reciprocal agreement being terminated. This is due to the fact that New Jersey imposes its personal income taxes at lower rates than the PA flat tax at lower income levels. 

The city of Philadelphia imposes an earnings (payroll) tax on nonresidents of 3.4741%. The Philadelphia earnings tax has been imposed on the wages of New Jersey residents employed in Philadelphia, while the reciprocal agreement exempted that wage income from PA state income tax. New Jersey residents working in Philadelphia would claim a resident credit, which in some instances could have completely offset the New Jersey tax on the wage income. But with PA state income tax being incurred on top of the Philadelphia tax, there will be a direct tax cost to any New Jersey resident working in Philadelphia.