Minnesota terminates income-tax reciprocity

About 13,000 Minnesota residents who work in Wisconsin will have to file income tax returns in both states next year, and roughly 8,000 of those will see a tax bump estimated to average $300 a year.

That's one result of Minnesota's decision, announced by the state Revenue Department on Friday, to terminate a longstanding income-tax reciprocity program with Wisconsin.

But ending the deal as of Jan. 1 also will generate an estimated $131 million for Minnesota over the next two years, a revenue stream that Gov. Tim Pawlenty is counting on to help balance the state budget.

The reciprocity deal, which goes back to 1968, lets thousands of Minnesota and Wisconsin residents who work across state lines file a single return. Because more than twice as many Wisconsin residents cross the border for work, Wisconsin reimburses Minnesota for income tax it collects from Minnesota workers. But those payments arrive about 17 months after they're collected, a lag that has long frustrated Minnesota politicians.

"That delay is no longer acceptable, especially in light of the economic situation we face," Pawlenty wrote in a letter, dated Friday, to Gov. Jim Doyle of Wisconsin.

In June, Pawlenty used his emergency authority to close a $2.7 billion gap that remained in the state's 2010-11 budget after he and the Legislature failed to agree on how to pay for spending bills.

Pawlenty slashed millions in state spending with his power to "unallot" and used a major accounting shift to resolve the deficit. As part of the plan, he called on Wisconsin to speed up payments under the reciprocity deal, paying in the same fiscal year in which Minnesota's tax loss was incurred.

"We just weren't able to reach an agreement," said Ward Einess, Minnesota revenue commissioner.

8,000 will pay $300 more

Across the border, the deal's termination was greeted as "unfortunate" and "disappointing" by Wisconsin Revenue Secretary Roger Ervin in a statement issued Friday.

Wisconsin, like Minnesota, has had budget problems, so finding extra money now was a challenge. Plus, any deal the staffers reached on taxes would have had to be approved by the Wisconsin Legislature, making agreement more difficult, Einess said.

"I understand Wisconsin's reluctance to do that," said Sen. Tom Bakk, DFL-Cook, chairman of the Senate Tax Committee.

About 13,000 Minnesotans who work in Wisconsin and about 33,500 Wisconsinites who work in Minnesota will have to file returns in both states because of the end of the tax agreement. About 8,000 Minnesotans will end up paying more, an average of about $300 per year, because Wisconsin has higher overall tax burdens on individuals, Einess said. But no Minnesota resident will have to pay more in Minnesota tax, he said.

The state will also see tax revenue more quickly because it will be paid directly starting in January 2010. That means it can bank on an extra $43 million for next year's budget and an extra $88 million in 2011.

While much of the $131 million generated as a result of canceling the agreement will be a one-time boost, Minnesota will get about $17 million a year in ongoing benefits, Einess said. That's because the two states had disagreed about how much was owed, he said.

The Minnesota reciprocity law allows the revenue commissioner to terminate the agreement if "it is deemed to be in the best interests of the people of this state."

Despite the end of the agreement, Einess said the two states will continue to work together on other issues. This year, the two governors have pushed to unite some of their services as a way to save money. Those efforts won't end just because Minnesota broke off the tax agreement, the commissioner said.