In an about-face, New Jersey Gov. Chris Christie revived a four-decade old tax agreement with neighboring Pennsylvania that was set to end Jan. 1.
Christie announced Tuesday that the income tax reciprocity agreement he had planned to suspend will be salvaged after finding $200 million in savings from legislation he signed into law Monday designed to help curb public employee healthcare costs.
The Republican governor had previously said in September that the state needed to revoke the pact and tax Pennsylvania residents who work in New Jersey because of a $250 million budget shortfall caused by Democratic lawmakers failing to make necessary public employee healthcare insurance cuts. Ending the tax arrangement with the Keystone State, first implemented in 1977, was estimated to bring $180 million in new revenue to New Jersey while Pennsylvania stood to lose $5 million a year.
"By addressing a potential $250 million budget deficit from growing healthcare costs, we are now able to save an income tax reciprocity agreement with Pennsylvania that protects tens of thousands of hard working New Jerseyans from having to pay more income taxes," said Christie in a statement.
Pennsylvania has a flat income tax rate of 3.07% compared with New Jersey's rates that range from 5.52% to 8.95% for those earning more than $40,000. Pennsylvania residents working in New Jersey have been able to pay the lower income rate from their home state under the tax agreement.
"We are pleased that Governor Christie has changed his mind about ending an arrangement that would have punished 125,000 Pennsylvanians working in New Jersey and cost the commonwealth approximately $5 million," Pennsylvania Secretary of Revenue Eileen McNulty said in a statement. "For nearly 40 years this agreement has been in the mutual interest of creating jobs and opportunities in the region. We empathize with Pennsylvania employers and payroll companies that have been preparing for this change in policy and we regret the time and resources spent in order to be in compliance."
A Sept. 9 S&P Global Ratings report noted that ending tax reciprocity could potentially encourage employers to move from New Jersey to parts of Pennsylvania that have lower tax rates. This would have resulted in a potential minor economic downside for New Jersey and upside for Pennsylvania, according to S&P.
New Jersey has incurred 10 credit downgrades since Christie took office in 2010 due mainly to structurally unbalanced budgets and rising unfunded pension liabilities. S&P downgraded New Jersey bonds one notch to A-minus on Nov. 14. The Garden State is rated A2 by Moody's Investors Service and A by Fitch Ratings and Kroll Bond Rating Agency.
Pennsylvania debt is rated Aa3 by Moody's and AA-minus by Fitch and S&P.
Christie's decision also impacts Philadelphia, which faced an estimated $50 million annual loss in revenue had the tax pact ended, according to Janney Capital Markets.
"We're pleased to see this longstanding agreement will be maintained," said Philadelphia City spokesman Mike Dunn.