New Jersey Governor Christie said on Friday the state would begin taxing income earned by people who work in New Jersey but live in Pennsylvania, ending a long-standing arrangement with the neighboring state.
Pulling out of the nearly 40-year old "reciprocity" agreement would allow New Jersey to raise more revenue starting Jan. 1.
Christie, a close ally of Republican presidential nominee Donald Trump, said in a statement that he was forced to act because the Democrat-controlled legislature created a $250 million budget hole in June by relying on public employee health insurance cuts they have not yet made.
If lawmakers come back next week and cut health costs, Christie could consider "revising" his termination of the reciprocal tax pact.
"I will not raise state taxes, cut property tax relief, reduce aid to education or our hospitals, or reduce the state's record pension payment to cover for this blunder by the legislature," Christie said.
Jeff Sheridan, press secretary to Pennsylvania Governor Tom Wolf, said Christie "erred significantly in his decision to unnecessarily punish 125,000 Pennsylvanians and cost the commonwealth $5 million annually."
He said Wolf, a Democrat, was hopeful Christie would change his mind. However, Christie seems committed to making Pennsylvania "suffer the consequences of his failure to enact a responsible budget in a bipartisan way," Sheridan said.
Pennsylvanians pay a flat 3.07 percent income tax rate with no personal exemptions. New Jerseyans pay higher rates the more they make, with progressive rates increasing from 1.4 percent to 8.97 percent.
The reciprocal agreement is advantageous for high-income Pennsylvania residents who work in New Jersey, because they pay their state's lower tax rate. It is also good for low-income New Jerseyans who work across the border because of New Jersey's progressive tax system.
New Jersey Senate President Steve Sweeney said in a statement that ending the scheme is "the wrong decision for our state" and that more than 100,000 New Jersey residents will pay almost $1,000 per year in additional income tax.
"The burden falls completely on working families in New Jersey, especially those in South Jersey who work in Philadelphia, and will have a very real impact on their quality of life," he said.
(Reporting by Hilary Russ; Editing by David Gregorio)