Doug's Diggings: Ending tax reciprocity has many puzzled

Talk about it

There are a lot of hard feelings in Hudson and St. Croix County regarding the recent elimination of the income tax reciprocity agreement between Minnesota and Wisconsin.

State Sen. Sheila Harsdorf was in Hudson last week and has taken a proactive stance by organizing a meeting in Woodbury Monday, Oct. 12, to address the issue. Harsdorf, a Republican, is working with Minnesota State Sen. Kathy Saltzman, a Democrat from Woodbury.

In this day and age, it is always encouraging to see two people from opposite parties working together in an effort to solve a problem. They have invited legislators along the Minnesota and Wisconsin border to seek a strategy that will lead to the reinstatement of the reciprocity agreement.

The meeting, by the way, is at 9 a.m. at the Woodbury City Hall (Birch Conference Room), 8301 Valley Creek Road.

That said – don’t get your hopes too high.

“It is unlikely that this will be solved in the next few months,” Harsdorf said.

Since both Wisconsin Democratic Gov. James Doyle and Minnesota Republican Gov. Tim Pawlenty are serving lame duck terms – the reciprocity issue may not realistically be solved until new governors are in office. That happens after the November 2010 election, or when the new officials take office in 2011.

With the end of the agreement, as it stand today, Wisconsin people working in Minnesota, or vice versa (totaling nearly 50,000), will have to file state returns in both states. Essentially a Wisconsin resident will pay taxes in Minnesota, file a Minnesota return to get a refund and pay Wisconsin taxes with the Wisconsin return.

There has been an income tax reciprocity deal in place between the two states since 1968. The current version has been enforced since 2001.

Reciprocity allowed people who cross the border for work to pay income tax in their home state, and the state governments settled up later.

Termination of the agreement will affect about 33,500 Wisconsinites working in Minnesota and about 13,000 Minnesotans who work in Wisconsin.

Since more than twice as many Wisconsinites work in Minnesota, Wisconsin always ends up paying Minnesota. Because there was a gap of several months, the agreement called for Wisconsin to pay 8 percent interest on the money it owed Minnesota.

Wisconsin paid Minnesota $75.9 million on Dec. 1, 2008 ($7.8 million of that total was interest). Those numbers are for one year, hence the two-year budget is about double.

In an effort to get the agreement renewed, Wisconsin volunteered to pay 50 percent in April and the balance in December (plus any interest).

Harsdorf said Minnesota countered with having Wisconsin send 75 percent of the money in April. To that, Wisconsin balked.

“The formula is always based on income from a couple of years ago,” Harsdorf said. “With the current economic conditions, Wisconsin officials felt 75 percent of the 2007 numbers could be the entire payment or possibly even more than the state would owe for 2009.”

So, the deal fell through.

Harsdorf hopes the meeting in Woodbury next week will accomplish a couple of things. In an ideal world, of course, a plan could be brought forward to reinstate the reciprocity program immediately. That is unlikely but Harsdorf is hopeful that some good options will be crafted that can be used down the road.

“My biggest fear is that once the reciprocity ends, it could spill over into other areas,” Harsdorf said.

The most obvious is the tuition reciprocity between Wisconsin and Minnesota. The Gopher state was unhappy with parts of that agreement a few years ago – Harsdorf hopes the tax issue does not snowball into other agreements.

The tax reciprocity agreement that is ending affects taxpayers who work in Minnesota in this way: Minnesota will still withhold tax in 2010 and use that to make payments for 2009 taxes. A taxpayer will have to file just the single return in April 2010. If nothing changes, the first date for double tax returns (returns to each state) comes in April 2011.

“It’s not like either state loses out,” said Harsdorf. “It’s really more of a convenience for taxpayers. We should really be operating as a region on these types of issues.”

Tags: tax reciprocity, opinion, columns, minnesota, wisconsin