New Jersey Gov. Chris Christie's Sept. 2 decision to revoke a nearly 40-year tax reciprocity agreement with neighboring Pennsylvania does not pose an immediate credit impact for either state, according to S&P Global Ratings.
S&P analyst David G Hitchcock noted in a report Thursday that New Jersey's annual tax revenue would increase by around $180 million from the policy change, but the impact will be less for 2017 because the Jan. 1 start date occurs halfway through the fiscal calendar.
Pennsylvania would lose around $5 million from the end of the tax pact, which since 1977 had allowed Keystone State residents working in New Jersey to pay the lower income tax rate of their home state.
S&P rates New Jersey general obligation debt at A and Pennsylvania at double-A minus and assigns both states negative outlooks.
"New Jersey would receive a net tax gain from ending the agreement because of its higher income tax rates, which it can now charge to Pennsylvania residents working in New Jersey," said Hitchcock in his report. "Pennsylvania's loss comes from the credits Pennsylvania residents will be able to claim on their state tax return for higher taxes paid to New Jersey."
Pennsylvania has a flat income tax of 3.07%. New Jersey's income tax rates range from 5.52% to 8.95% for those workers earning more than $40,000.
While Christie has indicated he could reinstate the tax reciprocity, S&P expects the longstanding agreement to end since it will lead to new revenue for the Garden State and could not be revived by legislative action. The Republican governor said discontinuing the tax agreement was based on the legislature's Democratic majorities creating a $250 million budget shortfall from failing to make public employee healthcare insurance cuts.
"S&P Global Ratings believes there could be a potential minor long-term economic downside for New Jersey and upside for Pennsylvania from ending this practice, to the extent it might encourage employers to move from New Jersey to parts of Pennsylvania other than Philadelphia, where the combined city/state income tax rate will be higher," said Hitchcock. "Furthermore, the extra revenue New Jersey expects to receive from ending tax reciprocity would not fully fill the $250 million of health care savings left unspecified in the fiscal 2017 budget, to the extent the full savings cannot be negotiated with the state's unions."
Hitchcock noted that when factoring in Christie's planned $250 million healthcare savings, the 2017 New Jersey budget projects a $540.1 million ending general fund balance, or 2.8% of budgeted appropriations. The estimates do not include the potential revenue gain from ending tax reciprocity or additional transportation expenses needed from the general fund stemming from Christie's recent executive order to fund "essential" transportation expenses after failing to replenish the state's Transportation Trust Fund by a July 1 deadline.
