United States

New Jersey retains personal income tax reciprocity with Pennsylvania

Reciprocity was scheduled to end Dec. 31, 2016

TAX ALERT  | 

On Nov. 22, 2016, New Jersey Gov. Chris Christie announced a reinstatement of the Pennsylvania and New Jersey Reciprocal Personal Income Tax Agreement—an agreement that permits New Jersey residents who work in Pennsylvania, and Pennsylvania residents who work in New Jersey, to avoid being subject to personal income tax in the state of employment, rather than subject to the tax in both the state of residence and employment.

On June 30, 2016, Gov. Christie issued Executive Order 209, ordering the state treasurer and attorney general to determine the necessary steps to withdraw from the agreement and to estimate the resulting impact on revenue collections. As described in the order, an additional $250 million for public worker health care was added to the state budget without corresponding measures to offset the addition. In September, the governor formally announced an end to the agreement.

The end of reciprocity was projected to add $180 million to the New Jersey state coffers and aid in balancing the additional public worker health care budget line. However, with the governor signing legislation that modifies and streamlines the state pharmacy system, resulting in taxpayer savings of up to $200 million, the potential budget deficit was effectively resolved.

The continuation of reciprocity was highly anticipated but caused Pennsylvania and New Jersey employers to consider withholding changes–changes employers will no longer need to implement for the new calendar year. Reciprocity was also a significant concern to employees who work in their nonresident state because while Pennsylvania imposes a flat income tax of 3.07 percent, New Jersey’s graduated personal income tax can be as high as 8.97 percent. Employers with withholding questions or concerns regarding the recent announcement should contact their tax advisors for additional information.

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