Madden – Sweeney Bill to Protect Interstate Tax Agreements Advances

TRENTON – Legislation sponsored by Senator Fred H. Madden and Senate President Steve Sweeney that would impose restrictions on the Director of the Division of Taxation’s authority to terminate reciprocal personal income tax agreements with other states without the approval of the Legislature cleared the Senate Budget and Appropriations Committee today.

The bill, S-878, would help preserve the bi-state agreement with Pennsylvania that allows taxpayers to pay income taxes in the state where they live by preventing the unilateral termination of these pacts by the New Jersey Division of Taxation without legislative approval.

“The reciprocal income tax agreement between New Jersey and Pennsylvania helps residents from both states, and there is no reason this agreement should ever have been threatened,” said Senator Madden (D-Camden/Gloucester).  “The current law gives too much power to the Director to terminate these types of agreements.  It is important to South Jersey residents, and this bill will make sure what happened in 2016 won’t happen again.”

“Protecting this agreement is important to the middle-class families who realize financial savings,” said Senator Sweeney (D-Cumberland/Gloucester/Salem). “Our goal is to make New Jersey a competitive state to attract businesses and create real job opportunities for our residents.”

In 2016, then Governor Chris Christie announced he would terminate the agreement between New Jersey and Pennsylvania because he needed to fill a deficit in that year’s state budget.  Christie later reversed his decision, and decided to stay in the agreement. Under current law, the Director of the Division of Taxation has broad powers to enter into and terminate reciprocal personal income tax agreements with other states without the input of the Legislature.

The bill would modify the existing powers of the Director to restrict its authority to terminate such agreements without the authorization, through enactment of a law, of the Legislature and the Governor guiding the Director to terminate the agreement. It would be retroactive to 1977, covering the New Jersey-Pennsylvania agreement.

Approximately 125,000 New Jersey residents commute to Pennsylvania and another 125,000 make the reverse trip, according to Census Bureau estimates. Pennsylvania has a flat 3.07 percent income-tax rate while New Jersey has a more progressive tax structure with rates from 1.4 percent to 8.97 percent.

New Jersey and Pennsylvania established the Reciprocal Personal Income Tax Agreement in 1977 allowing residents from both states who work across state lines to pay income taxes where they live rather than where they work.  This means that Pennsylvania residents who are employed in New Jersey are not subject to the New Jersey gross income tax, and New Jersey residents who are employed in Pennsylvania are not subject to the Pennsylvania income tax.  Instead, employers in each state are required to withhold the corresponding states gross income tax on compensation paid to employees.

The bill was released from the committee by a vote of 11-0, and will next head to the Senate for further consideration.