Committee makes another attempt to end income tax border battle

Minnesota residents working in Wisconsin are embroiled in their own border battle over state income taxes, and there’s bipartisan support to get the issue resolved.

It’s called reciprocity, which allows a person who lives in one state but works in another to only file a return in the state they reside. Minnesota has agreements with North Dakota and Michigan, but it has had an on-again-off-again relationship with Wisconsin.

According to the Department of Revenue, for tax year 2011, 55,743 Minnesota returns were filed by Wisconsin residents who earned income in Minnesota. Approximately 23,900 Minnesota returns were filed by state residents who earned income in Wisconsin.

Rep. Greg Davids

Rep. Greg Davids (R-Preston) sponsors HF1005 that would cool the feud with the hope of bringing the Badger State back to the reciprocity table for negotiations – a task that Davids admits may be difficult to achieve.

“It’s a perennial bill with quite a history,” Davids told the House Taxes Committee Tuesday. “It is a complicated issue. The bill, as submitted, is a little too rich, goes a little too far.”

While he laid it over for possible inclusion in an omnibus bill, he noted that it will need some work if it is to move forward. There is no Senate companion.

From 1968 through 2009, Minnesota and Wisconsin had an income tax reciprocity agreement. Because there are a lot more Wisconsin residents who work in Minnesota than there are Minnesotans who work in Wisconsin, the agreement provided for Wisconsin to make an annual payment to Minnesota to make up for the revenue foregone under reciprocity. But Minnesota terminated the agreement because Wisconsin continued to delay paying the money it owed the state from taxes Minnesota wasn’t collecting on Wisconsin workers in Minnesota.

Because there are relatively few cross-border workers with Michigan and North Dakota, those agreements do not require compensatory payments from one state to the other, and simply allow the affected taxpayers to just file returns in their state of residence.

Minnesota and Wisconsin took a step toward reconciliation in 2011 when there was agreement to a mandated benchmark study that would determine how many residents of each state earn income in the other state, and how much of tax revenue each state would have to forego in a reciprocity arrangement. With the study completed, Davids’ bill would make two major changes to the reciprocity law as it relates to Wisconsin.

According to a nonpartisan House Research Department summary, the bill would eliminate the commissioner of revenue’s discretion to decide whether to enter a reciprocity agreement, if Wisconsin agrees to reimburse Minnesota for its lost tax revenue. Additionally, the bill would force resolution of just how much Wisconsin owes Minnesota because of the difference in each state’s income tax structure. The bill would change the definition of lost tax revenue by allowing Wisconsin to deduct the full cost of the revenue it forgoes by not taxing Minnesota residents — not the lesser portion of revenue that Minnesota allows to be claimed as a credit against Minnesota tax when there’s no reciprocity.

Rep. Diane Loeffler (DFL-Mpls) doubts Wisconsin is in a financial position to commit to making the compensatory payments in a timely manner, as the state faces a major budget deficit. “To work it out, you have to have a partner on the other side of the table and in this particular moment in time, I wouldn’t see them being a very reliable partner.”