Financial ratings agency Moody’s believes a coming change in tax rates for commuters between New Jersey and Pennsylvania will be a positive development for New Jersey’s economy, and possibly its future credit rating. Tax reciprocity, or relief from paying income tax in both the state where one lives and the state where one works, is set to run out at the end of the year—and though the roughly 125,000 people who benefit from it won’t be happy, it could have an upside for the state’s credit.
Governor Chris Chrsitie announced his plan to end the 38-year-old agreement earlier this month, calling it fallout from the ongoing standoff over the state’s underfunded Transportation Trust Fund. New Jersey’s credit has been downgraded a record nine times during Christie’s tenure, increasing the cost of borrowing.
Although the announcement from Moody’s will not change the state’s A2-negative status, the agency cited the state’s projected $180 million in additional income tax revenue from Pennsylvania residents as a ‘credit positive’ that will benefit New Jersey much more than it hurts its neighbor.
“These commuters currently pay relatively low income taxes only to their home state,” the agency wrote. “Pennsylvania expects to collect only about $5 million less in net income taxes annually (gaining $199 million but losing $204 million), an immaterial amount in its $32 billion budget.
“Once reciprocity ends, Pennsylvania expects to lose taxes because its residents who work in New Jersey will first pay New Jersey income taxes, and get a credit against Pennsylvania income taxes. According to its analysis, Pennsylvania residents who commute to New Jersey have higher average wages ($62,874) than their counterparts who commute to Pennsylvania ($52,147). Therefore, Pennsylvania will lose more from its higher-income taxpayers who will pay New Jersey first than it will gain from lower-income taxpayers paying Pennsylvania first.”
The agency hedged the good news for the state with a gloomier overall picture, pointing to “slow economic recovery, optimistic revenue forecasting, and rapidly growing pension obligations and contributions.”
Its recovery from the last recession, analysts wrote, has lagged far behind that of other states.
“According to Rockefeller Center data, New Jersey’s 2015 revenue was approximately 7% above the pre-recession peak, versus average state revenue growth of 20%. As a result, the state has had revenue shortfalls in four of the past six years, and in fiscal 2016 (which ended June 30, 2016), revenues were $735 million below the original budget.
“In addition, the state will rapidly ramp up its annual pension contributions, which have averaged only 23% of the actuarially required contributions over the past five years.”