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A 40-year-old tax reciprocity agreement between Minnesota and Wisconsin, which appeared to be in its death throes a few weeks ago, may be getting a second chance at life.

Minnesota, Wisconsin revisit tax-reciprocity issue

A 40-year-old tax reciprocity agreement between Minnesota and Wisconsin, which appeared to be in its death throes a few weeks ago, may be getting a second chance at life.

The agreement — which allows residents who live in one state and work in the other to file only one state income tax return — was scrapped in September by the Minnesota Department of Revenue after discussions between Minnesota Gov. Tim Pawlenty and Wisconsin Gov. Jim Doyle broke down.

The conflict revolved around timeliness.

Because there are more than twice as many Wisconsin residents who work in Minnesota as Minnesotans who work in Wisconsin who are required to file income taxes on what they earn — 33,500 Wisconsinites, compared to 13,000 Minnesotans — Wisconsin has reimbursed Minnesota for the income tax that it collects from Minnesota workers. The problem, as Minnesota officials saw it, was that those payments from Wisconsin are customarily made about 17 months after the taxes are collected.

Earlier this year, Pawlenty asked Wisconsin to agree to repay the tax revenue faster, with the goal of using the additional revenue to help balance the state’s budget. But when negotiations broke down, Minnesota revenue officials announced last month that the reciprocity agreement was being scrapped, meaning that residents who cross state lines to work would have to file income tax returns in both states — and at least 8,000 Minnesotans would end up paying an average of $300 in additional taxes to Wisconsin.

Officials said the decision to end the agreement means that Minnesota will generate $131 million more during the 2010-11 budget cycle. As it stands now, the reciprocity agreement will end as of Jan. 1, 2010, which won’t affect taxes filed next year, but would go into effect for tax year 2010.

But earlier this month, legislators from both states delivered a message to the governors and revenue officials: Not so fast.

“I think there were legislators on both sides of the river watching this and wanting to work something out,” said Carrie Lynch, press secretary for Wisconsin Senate Majority Leader Russ Decker, D-Schofield. “There are numerous legislators on both sides with constituents who are [affected] by this.

“I think everyone on both sides was hopeful that we could restart these negotiations so we could keep the agreement in place between the two states.”

On the Minnesota side, state Sen. Kathy Saltzman, DFL-Woodbury, helped arrange a mid-October meeting in Woodbury attended by members of both state Legislatures and both political parties, with the goal of reaching a satisfactory agreement. The result of that meeting was a letter to both governors, signed by nine Minnesota lawmakers and a dozen from Wisconsin, asking that the issue be revisited.

“We asked them to find a short-term solution and also discuss a longer-term solution to address the fact that we really hadn’t reviewed the formula used [to calculate payments] in a number of years,” Saltzman said. “We agreed that we needed a new benchmark study that would address Minnesota’s concerns.”

An unofficial deadline of Nov. 1 was established to give both states time to alert affected taxpayers and employers, but that date came and went with no substantive progress, even though Minnesota Commissioner of Revenue Ward Einess sent his own letter to his counterpart in Wisconsin, Revenue Secretary Roger Ervin, saying that he’d be willing to reopen negotiations.

In the meantime, Saltzman said, Wisconsin’s legislators continued working with that state’s nonpartisan finance staff members, trying to iron out a solution based on some of the offers that Minnesota had submitted earlier. “They told me, ‘These look very reasonable,” Saltzman said. “That’s when I sensed that they really wanted to do something.”

And last week, Einess spoke to Wisconsin Sen. Mark Miller, D-Monona, co-chair of the Legislature’s Joint Committee on Finance, about reopening the discussion.

“This cooperative arrangement has served both states well for several decades, and I was encouraged by your willingness to resume negotiations of the agreement,” Einess wrote in a follow-up letter to Miller. “ … It is my hope that we can come to an agreement that is advantageous to the taxpayers of both states.”

Wisconsin law allows its state Legislature to call itself back into what’s known as an “extraordinary session” if an issue comes up that must be resolved outside of the regular session, according to Lynch. Such a scenario — which does not require action by the governor — likely will come into play if negotiations progress satisfactorily, she said.

Minnesota and Wisconsin officials have agreed to wait until the state’s new revenue forecast comes out on Dec. 2 to resume discussions on the reciprocity agreement, according to Kit Borgman, communications director for the Minnesota Department of Revenue, who said Einess told Miller that it would be “premature” to schedule a meeting before the forecast comes out.

Because predictions are that the new revenue forecast will paint a much gloomier picture of Minnesota’s budget deficit, it’s likely that Minnesota’s previous offers to renegotiate the reciprocity agreement will be rendered moot, and “we’ll have to reopen the negotiations and start from scratch,” Borgman said.

Still, legislators remain hopeful that income tax reciprocity between the two states can be preserved.

“I am encouraged to see Wisconsin taking this issue seriously,” Rep. Roger Reinert, DFL-Duluth, said in a statement. “I am particularly encouraged by their willingness to even call a special legislative session yet this year to address this critical issue.

“In a down economy and uncertain financial times, the last thing state government ought to be doing is making the financial picture of individual families and business more difficult and complex.”

Saltzman agreed.

“This is probably not the usual way that you work across state lines, but at the same time, it’s people saying that whoever wants to come to the table and work on a solution should do that,” she said. “I applaud all of them for that.

“In a broader sense, the issue is that we need to find ways to work together to support a regional economy. You talk about competition, but it’s not just across the St. Croix River; our greater competition is the east and west coasts and the rest of the world. We’ll be stronger if we build a stronger upper Midwest economy. The idea is trying to find beneficial partnerships.”

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