Don't Mess With Taxes

Remember back in July when New Jersey Gov. Chris Christie indicated that he might end the Garden State's tax reciprocity agreement with neighboring Pennsylvania?

The Benjamin Franklin Bridge spans the Delaware River and connects Philadelphia, Pennsylvania, and Camden, New Jersey. It is used by commuters who live in one state and work in the other.

He wasn't kidding.

Friday, Sept. 2, was the last day for either state to stick with or pull out of the agreement for another year. And as the long Labor Day holiday began with lots of folks heading off for one last summer hurrah -- many no doubt planning to go to the Jersey Shore before Hurricane Hermine's development -- Christie delivered the news of the 38-year-old tax deal's impending doom on Jan. 1, 2017.

In a statement regarding the decision, New Jersey's Republican governor said:

"Today's action was made necessary by the legislature irresponsibly creating a $250 million state budget hole in June. They assumed public employee health insurance savings but did not give me the tools to make those savings real. I will not raise state taxes, cut property tax relief, reduce aid to education or our hospitals, or reduce the state's record pension payment to cover for this blunder by the legislature."

Christie characterized the move as "the least painful option I have to fulfill my constitutional duty to balance the budget for New Jersey taxpayers."

UPDATE: I guess the pain was just too much. On Nov. Christie announced he will keep the agreement in place that allows New Jersey and Pennsylvania residents who work across state lines to pay income taxes where they live rather than where they work.

Big state tax changes on the horizon: But the end of the arrangement where taxpayers pay what's due to the state where they live, not work, could be very painful for cross-border commuters on both sides of the New Jersey-Pennsylvania line.

Currently, residents who work in either state are allowed to pay income taxes at their home state's rate.

What Reciprocity Means to Taxpayers
Federation of Tax Administrators 2013 Report

With reciprocity, the taxpayer files a return
and pays the tax only in the state where they live.

Without reciprocity, taxpayers who work in another state
file two returns and pay tax in both states
AND pay the equivalent of the higher of the tax
of the state of employment or the state of residence.

Without reciprocity, however, high-earning Pennsylvanians who work in New Jersey, which has a progressive tax structure of rates topping out at 8.97 percent, and low-income New Jersey residents who work in Pennsylvania, with its 3.07 percent flat income tax rate, will take tax hits.

Scott Drenkard, director of state projects for the Washington, D.C.-based Tax Foundation, provided the Associated Press with some post-reciprocity scenarios:

A Pennsylvania resident who works in New Jersey and makes over $40,000 files a return in Pennsylvania, pays her taxes, then files a return with New Jersey. If taxed at 5.53 percent in New Jersey, she would owe that amount minus credit for her tax payment to Pennsylvania.

A low-income New Jersey resident would file at home, then with Pennsylvania. Since New Jersey's rates are lower than Pennsylvania's -- 1.75 percent for income from $20,000 to $35,000 -- the taxpayer would get a credit for taxes paid at home, but then pay some fraction to Pennsylvania.

Jocks affected, too: And as my Twitter conversation back in July after Christie first floated the idea of ending the reciprocity deal demonstrates, professional athletes living in Pennsylvania and New Jersey and playing in the other state will be affected, too.

A reversal of tax fortune? Drenkard called the possible elimination of the reciprocity agreement a loss for tax simplicity and "absolutely a money grab."

That type of reaction was swift and similar in both affected states.

Christie did, however, leave open the possibility that he would reconsider his axing of the New Jersey-Pennsylvania tax arrangement if his state's legislators return to Trenton and come up with another solution to the state's budget gap.

Until that happens, though, 38 years of tax reciprocity could be doomed.

And that possibility is enough to earn the agreement's almost four decades this week's By the Numbers recognition.