The two states have been seeking a new agreement to replace one that ended in 2009, but Minnesota says the latest offer would leave it $6 million short.
Officials from Minnesota and Wisconsin said they do not expect a new income tax reciprocity agreement between the two states anytime soon.
Minnesota revenue officials said the latest offer from their neighbor would leave Minnesota about $6 million a year short, partly because of Wisconsin’s higher income tax rates on middle-class residents.
“Why would Minnesota want to subsidize the higher tax rates in Wisconsin?” Minnesota Revenue Commissioner Myron Frans asked at a forum Monday with his Wisconsin counterpart.
The two states failed to reach a reciprocity agreement by the Oct. 1 deadline, which means that about 80,000 taxpayers who live in Minnesota or Wisconsin and work in the other state will have to file income taxes in both states for at least the 2014 tax year.
The states have not had a reciprocity accord since 2009. Under the previous agreement, residents would simply file income taxes in their home state and revenue officials would sort out which state is owed what. Since so many more Wisconsinites worked across the border, Wisconsin usually owed Minnesota tens of millions of dollars every year.
Former Gov. Tim Pawlenty ended the agreement in 2009, frustrated that Wisconsin withheld its payment to Minnesota for almost a year amid a sunken economy..
Richard Chandler, secretary of the Wisconsin Department of Revenue, said the two states conducted separate studies that resolved the issues of the payment timing and gave a more accurate portrait of how many residents cross the border to work.
But those solutions did not tackle the $6 million problem for Minnesota.
Like most states, Minnesota offers a special tax program for residents who work in other states that gives them a tax credit equal to the amount that the workers would pay in Minnesota.
Minnesota’s income tax rates are generally lower than Wisconsin’s, and under the latest reciprocity proposal, Minnesota would make up the difference for its residents who work in Wisconsin.
Frans said that is not fair for Minnesota taxpayers, and that it is up to Wisconsin to make it right.
“We have no intention of changing it,” Frans said of the tax credit program, which has been around since 1961. “It’s a good rule.”
Chandler said lawmakers in the Badger State call the $6 million payment a form of ransom, one they are not willing to pay.
Asked if they thought there were a way to broker a deal anytime soon, Frans and Chandler shrugged.
Chandler then joked that the relentless drive to lower taxes by his boss, Republican Gov. Scott Walker, might actually erase the $6 million deficit on its own.