Minnesota and Wisconsin residents who live in one state but work in the other could soon have their income taxes dramatically simplified as part of a new tax reciprocity proposal.
Minnesota revenue officials on Thursday offered to lower Wisconsin’s annual payment by $1 million if the Badger state approves of the agreement by Sept. 30.
‘That millions dollars is part of Minnesota’s strong desire to reinstate income tax reciprocity,” said Sen. Roger Reinert, a Duluth Democrat who has worked with other border legislators for an agreement. “This really is us extending a hand and saying, ‘Work with us.’”
Wisconsin and Minnesota have not been able to broker a new arrangement since the four decade old income tax reciprocity agreement lapsed at the end of 2009. Suddenly, 80,000 residents who lived in one state but worked over the border had to file income taxes in both states.
Wisconsin revenue officials could not immediately be reached for comment.
The deadlock has come down to money.
Minnesota revenue officials studied the issue and determined that about 56,000 Wisconsin residents work in Minnesota, more than double the amount of Gopher state residents who cross the border for work.
Minnesota's study concluded that Wisconsin needs to pay about $92.5 million a year due to the difference.
The problem is, that’s about $4 million more than Wisconsin officials believe they should pay.
Minnesota made similar offers in 2012 and 2013, but both offers included the $4 million gap. Wisconsin officials rejected both proposals.
This year, Minnesota legislators decided to see if an additional $1 million might sweeten the deal.
“It really is a desire on the part of border legislators who are trying to make it a little smoother,” said Minnesota Department of Revenue Commissioner Myron Frans.
Differing tax rates between the two states also aggravates the problem.
Minnesota limits the credit it offers consumers for taxes paid in another state to the amount they would pay if they lived in state. Frans said he does not believe Minnesota taxpayers should subsidize Wisconsin’s higher effective tax rate.
Wisconsin officials have said their residents already pay enough.
Reinert and other border legislators said they still routinely hear from residents frustrated with having to file two state income tax forms.
Business owners, Reinert said, are just as frustrated that they have to keep two sets of tax records for employees who live across the border.
The issue boiled over in 2009 as the economy tanked and budget officials in both states were desperate for money.
Wisconsin delayed its payments to balance the state budget, creating a deeper hole for Minnesota's budget officials.
Then-Gov. Tim Pawlenty grew frustrated and let the program expire, saying that Wisconsin’s 17-month delay was too much for Minnesota’s shaky budget.
The new agreement allows Wisconsin to make four equal payments a year, minimizing one-time blows that can be difficult in a sagging economy.
For state leaders, the issue has become a balance between protecting state money and promoting convenience for taxpayers.
Frans said the governor authorized the new $1 million dollar offer, but they refuse to make a deal unless it is fair for all Minnesota taxpayers.
Minnesota still has reciprocity agreements with Michigan and North Dakota.