Minnesota, Wisconsin ponder tax reciprocity renewal

ST. PAUL - Minnesotans and Wisconsinites who live in one state but work in the other have some reason to hope they will be able to resume filing a single state income tax return as early as next year.
In separate interviews, Minnesota Revenue Commissioner Cynthia Bauerly and Wisconsin Secretary of Revenue Richard Chandler said they recently discussed restoring the decades-long reciprocity agreement that simplified taxes for the 80,000 residents who cross the border for work.
Both Minnesota Gov. Mark Dayton and Wisconsin Gov. Scott Walker want to reinstate the tax pact if they can agree on a fair way to do it, the two tax officials said.
Minnesota House Tax Committee Chairman Greg Davids, R-Preston, sparked the renewed interest in reciprocity by introducing a bill that would remove the final obstacle to an agreement between the states. It would change the way the states calculate the payments Wisconsin makes to Minnesota.
“I will make every effort to restore reciprocity this session,” Davids said after a committee hearing on his bill this week.
Minnesota and Wisconsin had income tax reciprocity from 1968 to 2009, when Minnesota Gov. Tim Pawlenty halted it because the Gopher State was losing money under the deal. Wisconsin was 15 months late in making payments, and the two states disagreed on the amounts due.
Because 56,000 Wisconsinites work in Minnesota and 24,000 Minnesotans work in the Badger State, Wisconsin made annual payments to Minnesota to compensate for the amount Minnesota would have received by taxing border-crossing Wisconsin residents’ wages.
If the agreement were still in effect, that would amount to between $90 million and $100 million a year, according to the Minnesota Department of Revenue.
Without reciprocity, border crossers must file tax returns in both states.
“It continues to be a tremendous frustration,” said Wisconsin Sen. Sheila Harsdorf, R-River Falls. “Not only is it a hassle, but it’s a lot more costly. … No one is going to fill out two tax returns for the price of one.”
History of complaints
More than half of the Wisconsin border crossers live in the three counties closest to the Twin Cities - St. Croix, Pierce and Polk. And Harsdorf said she has been hearing their complaints since the pact was scrapped.
The discussion between Bauerly and Chandler is the latest in a series of attempts to renew the agreement. In 2011, the Minnesota Legislature ordered the revenue commissioner to start negotiations with his Wisconsin counterpart. The talks failed to produce a deal, but the two sides made progress.
Two years ago, Wisconsin agreed to speed up its payments to Minnesota, and it also offered to base the amount of the payments on benchmark studies that the two states had just completed. Chandler said that resolved the issues that prompted Pawlenty to scrap the deal in 2009.
But one sticking point remained. Minnesota wanted Wisconsin to pay another $6 million a year to cover a difference in the tax breaks the two states offer interstate commuters. Wisconsin said no.
Last year, Minnesota reduced its demand to $5 million a year. Wisconsin wouldn’t budge. Both sides insist they’re sticking to their principles.
Under Davids’ bill, which he called a “work in progress,” Minnesota would, in effect, drop its claim for the additional $5 million.
The Dayton administration hasn’t agreed to Davids’ proposal, but Revenue Commissioner Bauerly said she “wants to work with him on his bill.”
Wisconsin leaders praised Davids’ proposal. Chandler, the Wisconsin tax chief, said it offers “the makings of a deal.” And Harsdorf, the River Falls senator, said it “opens the door to reinstating the reciprocity agreement.”
Wisconsin: A reliable partner?
Wisconsin faces a $283 million budget deficit this year. That prompted Minnesota Rep. Diane Loeffler, DFL-Minneapolis, to question during a committee hearing this week whether Wisconsin would be a “reliable partner” under a new pact.
“We’ll be a very reliable partner in that we are in a position to make the payments,” Chandler said. He said Walker has proposed a balanced budget that would cover any reciprocity payments, and the Legislature is expected to pass it.
Davids, who represents a border district in the southeastern corner of Minnesota, said there’s strong bipartisan support for a reciprocity bill in the Republican-controlled House.
DFLers who control the Senate are waiting for a signal from the Dayton administration. “If Commissioner Bauerly can make progress, I’m certainly supportive,” said Senate Tax Committee Chairman Rod Skoe, DFL-Clearbrook.
It’s too late to implement a new agreement for income tax returns due this year.
To provide reciprocity next year, Bauerly said the two states must reach an agreement by the fall. Tax officials in both states need time to change tax forms and withholding instructions and to give employers time to adjust taxes to be withheld.
If Minnesota lawmakers fail to pass a reciprocity bill, “I’ve got some other ideas,” Davids said. He’s considering proposing state tax breaks for Minnesotans who work in Wisconsin to even out differences between what residents on either side of the border pay.
“There will be reciprocity provisions in the House tax bill,” he pledged.
The Pioneer Press is a media partner of Forum News Service.