By Kate King

New Jersey Gov. Chris Christie said the state would continue its income-tax reciprocity agreement with Pennsylvania, backing off his September threat to end the pact to plug a $250 million budget hole.

The tax arrangement allows about 250,000 New Jersey and Pennsylvania residents who work across the border to pay income taxes only in their home state. On Tuesday, the Republican governor said changes to the state's health-care plan and a new law aimed at reducing state pharmacy benefit costs allowed the state to maintain its nearly 40-year reciprocity arrangement with Pennsylvania.

The health-care changes will save an estimated $100.5 million this fiscal year, state officials said. The new legislation, signed by Mr. Christie on Monday, allows the state to quickly hire a benefits management firm to audit drug prices and reduce overcharges and is expected to eventually save $200 million a year.

About 143,000 New Jersey residents were employed in Pennsylvania as of 2014, according to a spokeswoman for the state Department of Labor. Ending the reciprocity agreement would have increased the tax bills of lower-income Garden State residents because Pennsylvania has a flat income-tax rate of 3.07% while New Jersey has progressive tax rates ranging from 1.4% to 2.45% for residents earning $70,000 or less in taxable income.

Mr. Christie said in a statement that continuing the reciprocity agreement "protects tens of thousands of hard working New Jerseyans from having to pay more income taxes." Lawmakers in southern New Jersey hailed the agreement's continuation.

Ending the reciprocity agreement would have allowed New Jersey, which has tax rates ranging from 3.5% to 8.97% for incomes of $80,000 and above, to tax higher-earning Pennsylvania residents who work in the Garden State. Taxing Pennsylvania workers would have generated an additional $180 million in annual revenue for New Jersey's budget, the state Department of the Treasury said.

New Jersey doesn't have a tax reciprocity agreement with New York, meaning residents who live in one state and work in the other must file taxes in both states.

Write to Kate King at Kate.King@wsj.com

(END) Dow Jones Newswires

November 22, 2016 17:37 ET (22:37 GMT)

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