In 1981, Palaia was elected to the New Jersey General Assembly, the lower house of the New Jersey Legislature, where he served until 1989. In 1984, he served as the Assembly's Assistant Minority Whip. He chaired the Assembly Education Committee during the one term Republicans controlled the Assembly from 1986 to 1988. He created bills signed into law that would allow for the state takeover of failing school districts and the requirement that 11th grade high school students pass a standardized test (High School Proficiency Assessment) to graduate high school.