All 41 states with broad-based income taxes assert the right to tax nonresident income earned within their borders.

Most of those with significant cross-border commuter flows approach the issue as New Jersey and Pennsylvania have done for 40 years, signing “reciprocity” treaties that allow residents of neighboring states to pay income taxes only where they live rather than where they work.

But New York, which in 1919 became one of the first states to enact its own income tax, has never agreed to such a deal. No matter where you live, if you earn money working within the borders of the Empire State—or, in some cases, even if you only telecommute to an employer in the state—New York will tax that pay.

It’s up to your home state to avoid double-taxing your income by giving you credit for whatever you owe to Albany. That’s what New Jersey has done since enacting its own broad-based state income tax in 1976.

This is a lucrative arrangement—for the Empire State.

Nonresidents accounted for $6.2 billion (15 percent) of the $42 billion in income taxes owed to New York in 2014, the latest year for which such data are available from the New York Department of Taxation and Finance. By far the largest chunk of New York’s nonresident income-tax payments — $3.1 billion, or half the total — came from New Jerseyans.

New Jersey residents filed 387,240 New York State tax returns, reporting average New York source income of $118,503. Most of those filers were daily commuters into New York City, census data indicate. (Less than half as many New Yorkers, commuting to jobs in New Jersey, paid total income taxes of $616 million to Trenton, according to New Jersey data.)

The New Jersey share of New York’s total personal income taxes stands out even in the context of the larger state’s enormous tax base: for example, the income taxes paid by New Jersey commuters equaled the total income tax owed by 1.3 million workers and small-business owners in the 17-county Western New York region, including metropolitan Buffalo-Niagara Falls and Rochester.

New Jersey generated more New York State income tax than the 1.1 million filers living in Brooklyn — more, for that matter, than any New York City borough except Manhattan.

Though New Jersey’s top income-tax rate of 8.97 percent is slightly higher than New York’s 8.82 percent, the two states have significantly different income-tax structures and rate schedules that produce a larger New York tax bill for most middle-class payers. Even with a full state income-tax credit from Trenton, most New Jerseyans earning money from employment or a business in New York end up paying more to Albany than they would have owed on the same income earned in Jersey.

New York further squeezes nonresident taxpayers by putting them in the bracket that corresponds to their gross incomes–including wages, capital gains, interest, and dividends earned (and taxable) solely in their home states. Thus, for example, a New Jersey married couple filing a joint return and reporting salaries of $75,000 from one spouse’s job in Manhattan and $75,000 from the other’s job in Jersey City will be subject to the same (higher) New York state rate as someone earning $150,000 entirely within the borders of New York.

New York City itself also imposes an indirect levy on nonresident commuters through its unique Unincorporated Business Tax (UBT), which claims 4 percent of the net profits from city-based professional and investment partnerships, indirectly hitting many of the highest-earning New Jersey residents working in the city. Jersey residents also pay New York City and State sales taxes on their taxable purchases in New York. And, of course, adding to the burden on many Garden State commuters are Port Authority bridge and tunnel tolls of at least $12.50 per crossing in peak hours.

So what do New York’s New Jersey taxpayers get for their money?

Most obviously, they gain access to the nation’s largest concentration of high-paying jobs, not to mention a lucrative market for a wide range of professional and business services. By the same token, however, New Jersey repays the favor by housing (and providing public services to) hundreds of thousands more skilled professionals, managers, and other workers than could be accommodated at equally affordable prices in New York City, Long Island, or the lower Hudson Valley.

In sum, New Jersey provides both a discount dormitory for Manhattan employers and a revenue engine for Albany, and New York pols take it for granted, unsurprisingly devoting most of their attention to projects directly benefiting their own constituents.

Nonresidents in general, and New Jerseyans in particular, are Albany’s unrecognized and unappreciated cash cows.

While New Jersey residents endure notably lousy commutes into the New York City metro area, their tax dollars flow up the Hudson and across upstate New York. That’s a feature, not a bug, of the New York State budget, which redistributes tax money from relatively affluent downstate to lower-income, stagnant, or shrinking upstate counties.

So, in effect, commuters from Paterson, Passaic, and Jersey City have been helping to foot the bill for higher state school aid to Buffalo, Rochester, and Syracuse.

Middle-class commuters from New Jersey townships like Allendale, Mountainside, and Interlaken pay in-state tuition of $14,000 a year to send their children to Rutgers, while their New York income taxes subsidize in-state tuition of $6,400 at SUNY and CUNY.

Now those same Jersey commuters will also get to subsidize New York Gov. Andrew Cuomo’s promise of “free” public college tuition for students from New York families with incomes below $125,000. Without the $3 billion in taxes paid by New Jersey residents, it would have been more difficult for Cuomo and the state legislature to create a $1.5 billion pot of discretionary funding for local pork-barrel projects around the state.

New York pols need to recognize that it’s in their own interest to pay more attention to these commuters, if only to keep their tax payments flowing smoothly. At the very least, that means giving a higher priority to infrastructure improvements that benefit taxpayers on both sides of the Hudson.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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