ST. PAUL - Nearly 80,000 people along the Minnesota and Wisconsin border face a more complex and costly income tax filing routine if the two states can't work out a dispute.
And $106 million to plug a Minnesota budget deficit is at stake.
While both states deal with massive budget deficits, Minnesota Gov. Tim Pawlenty demands that Wisconsin speed up payments to his state under a 41-year-old reciprocity agreement in which residents who live in one state and work in the other can pay income taxes only in their home state. The state where the employee works is reimbursed by the person's home state.
The agreement saves hassle and tax preparation costs for 57,000 Wisconsinites who work in Minnesota and 22,500 Minnesotans who work in Wisconsin.
Since so many more Minnesotans drive across the border to work than do Wisconsinites, the Badger state always owes Minnesota.
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Pawlenty says the trouble is that Wisconsin's payments are 17 months late. In looking for ways to plug a $6.4 billion deficit in the two-year budget that begin Wednesday, Pawlenty told Wisconsin Gov. Jim Doyle that he wants a $35 million payment next year and $71 million the following year to bring Wisconsin current in its debt.
"If we cannot reach agreement as to a more timely payment plan, Minnesota will need to consider terminating the reciprocity agreement as of Dec. 31, 2009," Pawlenty wrote to Doyle.
Doyle has received Pawlenty's letter and is reviewing it, according to Carla Vigue, the governor's deputy press secretary.
Minnesota Revenue Commissioner Ward Einess said he hopes to talk with his Wisconsin counterpart in the coming days to see if they can agree to a faster payment schedule.
"We are willing to accommodate them," Einess said.
The 80,000 taxpayers may be concerned about how hard Minnesota will try to negotiate a new deal because there is no fiscal incentive. If Doyle agrees to Pawlenty's demand, Minnesota would get $106 million. If the agreement is dissolved, which either state can do unilaterally, Minnesota stands to gain $134 million.
Still, Einess said, the Pawlenty administration would like to continue the reciprocity arrangement.
Doyle and Pawlenty earlier this year signed an agreement to work closer together in a number of areas, an effort to save both states money. However, the two have talked only in passing about the tax reciprocity issue.
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If the two states do not reach a deal to continue the arrangement, many residents who cross state lines to work would have to file income tax returns in both states, although they usually would not actually pay both states.
Einess said some would pay higher taxes if the agreement ends.
Minnesota has similar deals with North Dakota and Michigan, but Einess said so little money is involved that there will be no change. Likewise, Wisconsin has tax reciprocity agreements with Illinois, Indiana, Kentucky and Michigan, but they are not being scrutinized.
Western Wisconsin lawmakers are working to keep the Minnesota agreement in place.
In a letter signed by 18 western Wisconsin legislators, they urged Doyle to cooperate with Minnesota in resolving the dispute.
"It's not good to unravel reciprocity agreements," Sen. Harsdorf, R-River Falls, said. "I strongly support maintaining the income tax reciprocity agreement and have written letters to both governors urging them to cooperate on this matter to protect the interests of nearly 80,000 affected residents in both states."
Without the continued agreement, Harsdorf said, many of her constituents will face additional tax filing each spring and the cost for reporting taxes will increase.
Rep. Kitty Rhoades, R-Hudson, said the reciprocity agreement has worked well for years and now is not the time to end it.
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"Since 1968, the Minnesota-Wisconsin income tax reciprocity has streamlined the tax filing process for individuals who live in one state but work in another state," Rhoades said. "Through the years, this agreement has been the topic of budget discussions in both states but, through negotiations, the program has been successfully maintained."
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Holmquist is the New Richmond (Wis.) News managing editor. Davis reports for the Forum Communications Minnesota Capitol Bureau.
