Update: Governor Christie Retains New Jersey/Pennsylvania Reciprocal Income Tax Agreement

Last month, we reported on Governor Chris Christie’s intent to end the reciprocal income tax agreement with Pennsylvania, saying that New Jersey needed additional tax dollars that would come from ending the agreement to fill a budget gap. As it turns out, the Governor has reversed his decision to unilaterally end the state’s income tax agreement with Pennsylvania at the end of 2016. Pursuant to the reciprocity agreement, either state can withdraw by providing 120 days’ written notice prior to January 1 of the tax year.

Currently, Pennsylvania residents who receive compensation from New Jersey sources are not subject to New Jersey income tax on those earnings. Conversely, New Jersey residents who receive compensation from Pennsylvania sources do not pay Pennsylvania income tax on those earnings.  Under the agreement, a New Jersey resident who works in Pennsylvania only files a New Jersey return and a Pennsylvania resident working in New Jersey only files a Pennsylvania return.

Without the agreement, New Jersey residents working in Pennsylvania and Pennsylvania residents working in New Jersey would have to file two state individual income tax returns; one in which they work and one in which they live.  Absent the agreement, New Jersey would gain an estimated $180 million in revenue from Pennsylvania residents forced to pay taxes to New Jersey.

In late November, Governor Christie signed legislation, S-2749/A-4328, that modified New Jersey’s pharmacy benefits system. The legislation is estimated to save New Jersey taxpayers up to $200 million per year. As a result, Governor Christie now believes that this, and other recently enacted health benefit reforms, will bring in extra revenue for the state, thus ending the necessity to withdraw from the income tax agreement with Pennsylvania. This decision preserves the status quo for those taxpayers that live and work in both New Jersey and Pennsylvania.