Senator Pat Browne
Appropriations Committee Chairman
In 1834, nearly two centuries after the Duke of York conveyed the land and water of the present state of New Jersey to Lord Berkeley and Sir George Carteret, the U.S. Congress passed a compact between the states of New York and New Jersey. This compact was adopted to finally and permanently define the territorial rights over the Hudson River and the islands between the states.
In reconciling this long-standing boundary dispute, New Jersey was diligent while negotiating its claims to honor and protect the nation’s historical foundation, notwithstanding its parochial interests. Recognizing that New York had taken possession of the islands during the colonial period, New Jersey acquiesced, even though the islands were all closer geographically to the Garden State.
“From her beacon-hand glows worldwide welcome,” wrote Emma Lazarus in a fund-raising poem for the great Liberty statue. Yet, one may wonder if Lazarus’ timeless proclamation of openness still applies to the Garden State, especially if you’re from Pennsylvania.
Modern-day state governments are party to interstate agreements that were also spirited by our country’s fundamental ideals. “Income tax reciprocity agreements” is one example of these compacts.
Driven by a modern cry for “no taxation without representation,” agreements in 15 states allow residents of one state to pay income tax only to their state of residence, regardless of where the resident earns the income.
Recently, however, Gov. Christie has unilaterally withdrawn New Jersey from the agreement with Pennsylvania in order to address current budget challenges. This action is estimated to generate $180 million given the higher net effective income tax rate that the Garden State imposes. Yet, negative implications of this action to citizens of Pennsylvania and New Jersey far outweigh its short-term fiscal benefits.
The Garden State’s action will impose enormous tax increases on a significant population of Pennsylvanians who commute to New Jersey, given New Jersey’s top tax rate of 8.97 percent compared with Pennsylvania’s flat rate of 3.07 percent. Commuters will also face an increased level of tax compliance, requiring them to file returns with both Harrisburg and Trenton.
With middle-income New Jersey commuters also potentially exposed to paying more state tax, employers on both sides of the border will experience financial pressure from this decision. To ensure retention, job creators will have to increase the compensation of their employees to maintain the employees’ net earnings. In the alternative, employers will now have more incentive to follow their workforce with high-skill, higher paying jobs being more attractive to operations in Pennsylvania.
Given these prospects for increased high-paying jobs in the commonwealth and a projected net financial gain of $40 million from taxing middle-income South Jersey residents working in the Philadelphia region, one may ask why Pennsylvania should not concur with New Jersey’s decision.
Even if it was considered appropriate to forgo the foundations of long-standing interstate agreements, the most immediate concern would be the massive initial increase in taxation on many Pennsylvania resident commuters. A larger negative economic consideration for both states is the counterproductive results of cross-border tax differentials which perpetuate a “zero-sum game” in private investment.
Specifically, when business cost structures are played against each other, states only perpetuate a redistribution of investment among themselves without the creation of any new wealth. Resources that could be targeted to workforce competence and new market creation are squandered as tax policy decisions produce a “race to the bottom” fiscal strategy between states producing no net positive economic results.
It is a far more productive use of public-sector resources for states in close geographic proximity to work in partnership, leveraging combined natural and intellectual assets to promote overall long-term positive private fiscal growth, and as a direct result, long-term public budget sustainability. The Pacific Northwest Economic Region is a nationally recognized, public-private initiative and a benchmark example worth emulating. There, member states work collectively to increase the overall economic well-being and quality of life for all citizens of the region.
After Gen. William T. Sherman chose Bedloe’s Island in 1877 as the site for the placement of Lady Liberty, it was decided by Gen. Charles P. Stone, chief engineer for the project, to place the pedestal for the statue in the center of old Fort Wood, an 11-pointed, 19th-century fortification built to protect the growing economic interests of New York and New Jersey.
Just as America’s most enduring beacon of openness and opportunity was erected on the remains of conflict and hostility, state governments at times have put aside their competing interests to honor our nation’s history and founding principles toward the betterment of all citizens.
With New Jersey’s unilateral short-term actions to manage fiscal challenges, it is imperative that proactive efforts are made by state and federal officials to secure and maintain long-standing interstate initiatives that promote our national legacy and serve the long-term interests of our citizenry. Such actions will truly help to keep our lady’s lamp permanently lifted “beside the golden door.”