Individual Income Tax Insights: State Budget Problems Lead to End of Reciprocity in New Jersey, Pennsylvania

California, New Jersey, New York and Pennsylvania are among the states with the lowest-ranked fiscal condition for fiscal year 2014, according to a 2016 analysis by the Mercatus Center.[1] The report defines “fiscal condition” as a state’s ability “to meet . . . short-term and long-term obligations without incurring excessive debt, engaging in budget gimmicks, or using other evasive tactics.” Ranked fourth lowest, New Jersey’s long-term liabilities are double the amount of the state’s assets, indicating significant future fiscal problems, according to the report. The financial issues these and other states face often have impacts on individual income taxpayers.

Facing an unbalanced budget, Gov. Chris Christie announced Sept. 2 that he would be ending the 39-year-old tax reciprocity agreement between New Jersey and Pennsylvania, according to Leslie A. Pappas in Bloomberg BNA’s Weekly State Tax Report. Pappas notes that the change could potentially increase New Jersey’s annual tax revenues by $180 million by taxing Pennsylvania residents who work in New Jersey based on their income earned in New Jersey. The move is not without its critics, including Pennsylvania State Rep. Steve Santarsiero, who argues that the change could mean higher taxes for New Jersey employers who employ many Pennsylvania residents as well as the potential for those employers to leave the state, according to The Trentonian. For New Jersey residents who work in Pennsylvania, the end of the agreement may increase their tax bill by as much as $1,000 per year if their incomes are less than $110,000 annually, notes For Pennsylvanians with incomes over $65,000 (single filers) or $120,000 (joint filers) who work in New Jersey, the change means a higher tax bill, according to the Philadelphia Business Journal.

Other states have also addressed budget problems with changes to the individual income tax. For example, California’s Proposition 30, which temporarily increased the state sales tax rate and added three increased  personal income tax rates for high-income taxpayers, has been described as having an overall “progressive effect on California’s tax system” in an issue brief by the California Budget and Policy Center, a nonpartisan organization engaged in fiscal and policy analysis related to low- and middle-income Californians. Proposition 30 increased the income tax rates applicable to three new income brackets, all of which were above $250,000 (single filers) and $500,000 (joint filers) per year, according to the brief. The increases are scheduled to expire in 2018, but Californian voters could change that this November with Proposition 55, a ballot initiative which would, if passed, extend the increased tax rates through 2030, according to the L.A. Times.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How can states effectively solve fiscal problems while minimizing the burden on individual income taxpayers? 

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[1] The Mercatus Center report was published in June 2016 and used the most recent available data in its analysis.