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Minnesota offers to end tax reciprocity stalemate with Wisconsin

Minnesota is hoping to end a stalemate with Wisconsin over tax reciprocity. Whether it will work remains unlikely, according to state officials in Wisconsin.

Late last week, Minnesota Revenue Commissioner Myron Frans made Wisconsin an offer that could save Wisconsin $1 million in payments to level the playing field for revenue lost for Wisconsin residents working in Minnesota. More than twice as many Wisconsinites work in Minnesota than Minnesotans working in Wisconsin. The net result of reciprocity would leave Minnesota holding the bag for lost revenue without the equalizing payments from Wisconsin.

Frans said the loss for Minnesota in 2015 would be about $92.5 million. Under the proposal put forth, Wisconsin would reimburse Minnesota with payments totaling only $91.5 million if Wisconsin agrees to reinstate tax reciprocity for the 2015 tax year by Sept. 30.

The goal is to simplify filing for taxpayers, Frans said.

Wisconsin residents working in Minnesota and Minnesota residents working in Wisconsin are required to file income tax returns in both states since former Minnesota Gov. Tim Pawlenty ended tax reciprocity in 2009. The 40-year agreement ended because Wisconsin was slow to reimburse Minnesota for its revenue losses. Payments lagged by as much as 18 months from the time Wisconsin collected the taxes to the time it paid Minnesota.

Officials with revenue departments in both states agree that issue has been resolved with a plan that would require Wisconsin to make equal quarterly payments to Minnesota to reimburse Minnesota for its lost revenue.

The issue now is how much Wisconsin would owe Minnesota, and whether Wisconsin would be subsidizing the state of Minnesota.

“There can be no net revenue loss for Minnesota,” Frans said. He said other reciprocity agreements in Minnesota ensure that.

Frans said he put forth the offer to reduce what Wisconsin would owe by $1 million at the urging of Minnesota senators hoping to end the impasse.

“It’s very similar, by the way, to a previous offer made by the Department of Revenue, when negotiations broke down,” said Wisconsin Sen. Bob Jauch, D-Poplar. He said it’s a million dollars less, but it’s not a starting point for negotiations that would resolve the issue.

The states remain millions of dollars apart on what Wisconsin would owe its neighbor.

“You would not get legislative support or taxpayer support to subsidize Minnesota,” Jauch said. The senator said the difference is a result of Minnesota tax policy, not reciprocity.

­“I don’t think we’re ever going to get there. I’m glad to see that Minnesota is at least putting an offer out on the table. I think as a last resort, Wisconsin should consider this … reduction in payment.”

However, he said with most Wisconsin legislators representing districts that don’t border Minnesota, he said it would be a tough sell in Madison.

“I think it would be very difficult to convince 131 other legislators — many of whom don’t represent anyone who is affected by this — to vote for a tax subsidy to the state of Minnesota,” Milroy said.

The gap in revenue is estimated between $4 million by Minnesota revenue officials and $6 million according to Wisconsin officials.

“This is consistent, unfortunately, with what Minnesota has offered in the past,” said Jack Jablonski, deputy secretary of the Wisconsin Department of Revenue.

He said Wisconsin would end up filling the gap for $6 million for higher taxes paid by Minnesotans after reciprocity ended. Jablonski said it’s a payment Minnesota doesn’t collect from any other state with which Minnesota has a reciprocity agreement and results because Minnesota doesn’t offer a full credit for taxes paid to other states, unlike Wisconsin, the deputy secretary said.

“Citizens in Minnesota ended up paying higher taxes to the state of Minnesota because they didn’t get a full credit for taxes paid to Wisconsin,” Jablonski said.

Frans disagrees with the interpretation. He said the perceived gap stems from a higher effective tax rate collected by the state of Wisconsin.

When Pawlenty ended the reciprocity agreement between Wisconsin and Minnesota in 2009, Jablonski said Minnesota wanted a new study to determine what Wisconsin owed, and wanted payments accelerated. He said Wisconsin has met both those requests.

“We believe we could have a reciprocity agreement ASAP if we go back to the original reason why they ended reciprocity,” Jablonski said. “What we can’t do is make a payment … to basically subsidize Minnesota tax policy and help their treasury. That’s just something we don’t think we can, nor should we, do.”

Jablonski said Frans’ proposal is basically a coupon that would allow Wisconsin a $1 million savings on a proposal that would have Wisconsin taxpayers subsidizing Minnesota.

Frans remains hopeful the issue can be resolved; after all, it would simplify things for about 80,000 residents in both states that live in one state but work in the other.    

“This is something that should have been reinstated years ago,” Milroy said. “There hasn’t been a lot of movement thus far. It’s at least encouraging to see that Minnesota’s at least willing to put something out there, and hopefully, it will lead to the restoration of this agreement in the near future here.”