Tax reciprocity deal still unresolved
Although a key issue has been settled, Wisconsin commuters hoping for a break from the expense and inconvenience of filing income tax returns at home and in Minnesota shouldn't breathe a sigh of relief yet.
"I don't want to lose hope," said Wisconsin State Sen. Sheila Harsdorf (R-River Falls), who has actively advocated for reinstatement of reciprocity.
But, she said, "I don't want to mislead people into believing it's resolved, when it's not. It's not a done deal -- now it's up to Minnesota."
The two states' revenue departments recently released separate benchmark studies that agree: Wisconsin would owe Minnesota about $69 million annually to compensate the Gopher State for tax revenue it would lose under the reciprocity agreement dropped in 2009.
But, in a move Wisconsin officials find disheartening, Minnesota wants Wisconsin to pay another $6 million a year to cover a difference in tax credits the states offer interstate commuters.
The benchmark studies show that currently 56,000 Wisconsin residents work in Minnesota and 24,000 Minnesotans work in Wisconsin. Last year Wisconsin proposed paying $63 million each year, but Minnesota officials wanted $96 million. The studies determined the amount should be roughly $69 million.
Tax reciprocity, technically an agreement between the two states' governors, was in effect for 41 years. The agreement allowed residents who live in one state and work in the other to pay income tax in their home state with the state governments settling up later.
Because more than twice as many Wisconsinites work in Minnesota, Wisconsin regularly reimbursed Minnesota for the income tax it collected. But Wisconsin was making the reimbursements about 17 months after the taxes were collected.
Faced with a budget deficit and because Minnesota was losing money on the old deal, then-Gov. Tim Pawlenty scrapped reciprocity in 2009.
Last fall legislators and representatives of the states' revenue departments met and identified two issues: Wisconsin was taking too long to make payments and the benchmark study used to determine reciprocity payments was outdated.
In response, Wisconsin agreed to make quarterly payments and both states agreed to conduct new benchmark studies for calculating future payments. Those are the studies that were recently released.
"Everything they were asking for back in '09, Wisconsin has agreed to," said Harsdorf.
But after the reciprocity agreement ended, Minnesota changed its income tax law to prohibit Minnesota taxpayers from claiming full credit for income taxes paid to another state. Now Minnesota is asking for higher payments from Wisconsin -- a payment that had not been required under reciprocity.
Last week Minnesota Revenue Commissioner Myron Frans said his state doesn't want to subsidize higher taxes paid in other states.
But Wisconsin Secretary of Revenue Richard Chandler countered that Minnesota's limit on credits was adopted after reciprocity was cancelled. He said state law doesn't allow it and it's unreasonable for Wisconsin to send Minnesota $6 million for a tax increase that state imposed.
"It's really their tax policy that we would subsidize," said Harsdorf.
Wisconsin gives its residents full credit for income taxes they pay in another state, said Harsdorf. "Minnesota does not. Minnesota only gives their residents credit for what they would have paid if they were working in Minnesota."
She said legislators will continue to talk, but if Minnesota holds firm to its demand, reciprocity will not be revived.
An agreement must be reached by early fall to be effective for the next tax year.