New Jersey Should Keep Tax Deal with Pennsylvania in Place

Increasing taxes on working families is not a sustainable way to raise needed revenue.

Published on Sep 7, 2016 in Tax and Budget

US Tax Form 1040Last week New Jersey Gov. Christie notified Pennsylvania that he will likely move to end nearly four-decades-old tax agreement between the two states in an effort to boost revenues in the Garden State (and punish legislative leaders for failing to bend to his will on changing health benefits for public-sector retirees).

While ending the agreement would presumably bring much-needed revenue to New Jersey, it comes with harmful consequences to the state’s working-class residents. In the end, that price is too high and this is a deal not worth making.

Here’s how it works: Currently, New Jersey and Pennsylvania allow residents who work in the other state to pay income taxes to the state in which they live, not the state in which they work. So Bucks County residents working in Mercer County pay Pennsylvania income taxes, while Camden County residents working in Philadelphia pay New Jersey income taxes.

Ending this agreement would subject New Jerseyans who work in Pennsylvania to the latter’s income tax, and vice versa. Since New Jersey’s income tax is highly progressive – meaning that the wealthiest pay the highest rates – and Pennsylvania has a regressive flat income tax, wealthy and upper-middle-class Keystone Staters who work in New Jersey would pay more, as would working- and middle-class Garden Staters who work in Pennsylvania.

The result:

If you’re a New Jersey worker who files taxes as a single person and you earn less than $61,000 working in Pennsylvania, you will pay more in state income taxes. If you are in a married household and you jointly file your taxes, you will pay more if your household income is less than $113,000.

The news is even worse for working-class New Jerseyans who are employed in Philadelphia. The city levies a 3.47 percent wage tax, against which New Jersey residents can currently claim a partial tax credit. That would end along with the reciprocal agreement.

Ending the agreement might bring $180 million in annual revenue, according to the state’s former treasurer – and New Jersey can certainly use every dollar of revenue it can get. But state finances must also be viewed with fairness in mind, and on that front there are plenty of fairer ways to raise revenues – particularly when New Jerseyans at the bottom and in the middle already pay the highest share of their incomes to state and local taxes.

Here are just a few quick examples that, taken together, could bring in over $2 billion in revenue each year, and in a much more equitable and sustainable way:

  • Close tax loopholes that allow multi-state corporations to artificially shift revenue out of New Jersey: An estimated $110 million to $290 million in revenue each year
  • Raise income taxes on earnings of over $350,000 by implementing two new tax brackets: An estimated $1.1 billion in revenue each year
  • Roll back some of 2011’s business tax cuts (single-sales factor, cut in S-corporation minimum tax and carry-forward changes): An estimated $321 million in revenue each year
  • Levy taxes on a regulated and legalized marijuana market: An estimated $305 million in revenue each year