The termination of New Jersey's tax reciprocity agreement with Pennsylvania is a credit positive for the Garden State due to $180 million in estimated new annual revenue that will be generated, according to Moody's Investors Service.
Moody's analyst Dan Seymour said in a report Monday that New Jersey will benefit fiscally from Gov. Chris Christie's decision to revoke the 38-year-old tax pact effective on Jan. 1, because Pennsylvania residents working in New Jersey state currently pay lower income taxes.
Pennsylvania's analysis of U.S. Census data showed that roughly 125,000 people commute from each state to the other, according to Moody's. The reciprocal tax agreement has allowed Pennsylvania commuters to pay the state's flat 3.07% income tax rate instead of New Jersey's progressive income tax rate that reaches 8.97% in the top bracket.
"New Jersey's move to end the longstanding tax agreement comes amid ongoing budget challenges brought on by the state's slow economic recovery, optimistic revenue forecasting and rapidly growing pension obligations and contributions," said Seymour in the report. "New Jersey's revenue growth since the recession has lagged the national average."
Moody's rates New Jersey general obligation bonds at A2 with a negative outlook and Pennsylvania at Aa3 with a stable outlook.
Seymour cited Rockefeller Center data showing that New Jersey's 2015 revenue was approximately 7% above the pre-recession peak compared to a 20% U.S. state average. This has resulted in New Jersey having shortfalls in four of the past six years including $735 million below original budget projections during the 2016 fiscal year. The state is also expecting to ramp up its annual pension contributions, which in the past five years have averaged only 23% of the actuarially required contributions, according to Moody's.
Pennsylvania is forecasting that ending tax reciprocity will result in about $5 million less in annual net income taxes, which Seymour said is "an immaterial amount" when factored into a $32 billion budget. The Keystone State's U.S. Census data showed that its residents who commute to New Jersey have wages averaging $62,874.
"Once reciprocity ends, Pennsylvania expects to lose taxes because its residents who work in New Jersey will first pay New Jersey income taxes, and get a credit against Pennsylvania income taxes," said Seymour. "Pennsylvania will lose more from its higher-income taxpayers who will pay New Jersey first than it will gain from lower-income taxpayers paying Pennsylvania first."
