A reciprocal tax agreement between the two states could be canceled by the governor, but lawmakers want to give Legislature final say on whether deal can be killed.

New Jersey's constitution makes Gov. Phil Murphy one of the most powerful state executives in the country, but a group of Democratic lawmakers from South Jersey wants to take away some of that authority, all in the name of preserving their region's hard-fought economic gains.

Motivating the lawmakers' effort is concern about the stability of a long-overlooked but now economically important tax-collection agreement that was struck four decades ago between officials in New Jersey and Pennsylvania.

The bistate deal lets commuters from each state pay income taxes where they live instead of where they work, and it has been praised as a key economic-development tool by South Jersey business leaders. But a recent political feud involving former Republican Gov. Chris Christie and Democratic legislative leaders almost resulted in the deal being scrapped, an episode that revealed something many lawmakers were completely unaware of: New Jersey's governor has the power to end the bistate tax agreement unilaterally, with no input at all from the Legislature.

The acrimony has now died down, with Christie having been replaced by Murphy, a Democrat. But it's inspired the lawmakers from South Jersey to draft legislation that would require a majority of the Legislature to first sign off before a governor can end the tax deal. The bill has strong backing from key business leaders in their region. It also won bipartisan support from lawmakers during a recent committee hearing in the Senate, and the measure is expected to win approval from the full Senate later today.

"It is important to South Jersey residents, and this bill will make sure what happened in 2016 won't happen again," said primary sponsor Fred Madden (D-Gloucester).

Reciprocal agreement

Officials from New Jersey and Pennsylvania struck the bistate "Reciprocal Personal Income Tax Agreement" in 1977, providing residents of each state the convenience of filing their taxes in the state where they live, even if they work on the other side of the Delaware River. At the time, the two states' income-tax structures were similar, meaning there was little financial impact for residents of either state as a result of the agreement.

But over the years, New Jersey's income tax has evolved into a progressive system that now involves residents paying at a higher rate as they move up a series of income brackets. The rates range from 1.4 percent at the lowest end, to 8.97 percent on earnings over $500,000. Meanwhile, in Pennsylvania, the state income tax is levied through a flat rate of 3.07 percent, regardless of income.

The differences between the two states' tax structures have created a series of tax benefits that both executives and rank-and-file workers can take advantage of if a company decides to set up shop in South Jersey. For example, well-paid executives have the option of living across the river in Pennsylvania, where they can pay income taxes under that state's lower flat tax. But lower-wage workers can choose to live close to their office in South Jersey, where they generally pay income taxes at a lower rate than they would under Pennsylvania's flat tax.

Gas and sandwiches

The existence of the bistate tax deal - there's no similar arrangement between New Jersey and New York - has been cited by business groups as one of the factors, along with lucrative state-tax incentive programs, that in recent years has helped to convince the leaders of companies like Subaru, Campbell Soup, and Destination Maternity to either move to South Jersey, or expand existing operations there. And even if some of the employees choose to live in Pennsylvania, it's still considered an overall good economic deal for New Jersey because jobs are initially created here for office construction, and other economic activity ensues as employees buy lunches and fill up their gas tanks locally once the new offices open.

The political bad blood between Christie and lawmakers in 2016 was resolved, but the nastiness showed how easy it really is for a governor to end the longstanding tax deal, even after many businesses have invested millions of dollars in recent years in new facilities in South Jersey.

Christina Renna, vice president of the Chamber of Commerce of Southern New Jersey, said during a recent Senate committee hearing in Trenton that Christie's 2016 effort was "a surprise" that "came out of the blue." But once it was analyzed more closely, the potential impact on businesses and their workers became clear.

"The possible dissolution of that agreement in 2016 really pulled the rug out from the business community here in South Jersey," she said.
"We have businesses like Campbell Soup Company in Camden, their (employees) were so engaged they wrote over 4,000 letters to policymakers, worried what the dissolution of this agreement would do to their paychecks," Renna said. "Campbell Soup itself was looking at land in Pennsylvania, to build a satellite office to retain those employees."

Meanwhile, Christie's flirtation with ending the agreement also revealed that the state would likely generate more revenue if New Jersey started collecting income taxes from everyone who is employed by a state-based company, regardless of where they live. Before pulling back on the threat to cancel the tax deal, Christie's administration disclosed in documents prepared for a 2016 bond issue that the change could net the state budget about $180 million in new revenue annually. With Murphy now in office, that same revenue could become a tempting pot of money, especially if lawmakers from his own party continue to resist his efforts to raise more cash by legalizing marijuana and hiking taxing on millionaires.

During the recent Senate committee hearing, Renna suggested the bill seeking to give lawmakers a say in the future of the tax deal would provide much-needed security for business leaders in South Jersey, including those who may still be considering a move across the Delaware.

"It is absolutely essential that we see it passed so we are not in the same situation we were in in 2016," Renna said.

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