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Lawmakers say workers suffer without tax agreement

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WOODBURY, Minn. - Legislators from Minnesota-Wisconsin border communities said thousands of workers will suffer if the states cannot restore an income tax filing agreement.

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A group of lawmakers who discussed Monday a tax reciprocity agreement set to end this year said they will draft a letter to Govs. Tim Pawlenty of Minnesota and Jim Doyle of Wisconsin urging continued talks ahead of a Nov. 1 deadline.

Without an agreement, some 46,000 people working across state lines will have to file income tax returns in both states, not just their home state, beginning in 2011.

"It's about convenience to the taxpayers," said Wisconsin state Sen. Sheila Harsdorf of River Falls.

"It's a convenience issue, but longer term it's, "How do we develop the concept of a regional economy?'" added Minnesota state Sen. Kathy Saltzman of Woodbury.

Pawlenty announced last month his state would back out of the tax agreement, in place since 1968. Since more Wisconsin residents work in Minnesota, Wisconsin long has sent payments to Minnesota. The Pawlenty administration wanted to speed up those payments to help balance Minnesota's books for the budget period ending June 2011.

As talks ended earlier this fall, Minnesota was seeking an accelerated payment of $72.5 million from Wisconsin, Minnesota Revenue Commissioner Ward Einess said. He said Minnesota would be willing to continue the agreement if the two states agree on a new payment schedule, but that must happen by Nov. 1 because employers need time to prepare tax information before January.

Failure to reach an agreement could affect Minnesotans and Wisconsin residents in a number of ways.

Residents from the two states who earn taxable wages across the border work will have to file income tax statements in both states. Minnesota revenue estimates show that includes 13,000 Minnesotans and 33,500 Wisconsin residents.

Bob Lang, Wisconsin Legislative Fiscal Bureau director, said some Wisconsin residents working across the border also will pay more in taxes, but there is not an estimate on how many people are affected. One-third of Minnesotans working in Wisconsin will pay more in taxes.

Those workers will pay more because the states' tax laws are different.

Also, Lang said, residents who have a business, such as a farm operation, in their home state but work across the border will not be able to deduct their business losses from their income earned in the neighboring state. Reciprocity allowed that.

"It sounds like it's going to be just a windfall for accountants in the next tax year," said Wisconsin state Rep. Kitty Rhoades, R-Hudson.

Pawlenty, a Republican, and Doyle, a Democrat, have discussed the issue multiple times in recent months. Einess and Wisconsin Revenue Secretary Roger Ervin also tried to negotiate new reciprocity terms. The tax pact has been threatened at times over the past several decades, Einess said.

"The reality is we have not had a good track record as far as negotiating these issues in the agreement," he said.

Each state has concerns that complicate negotiations. Wisconsin wants to change how it is assessed interest for tax collections owed Minnesota, and both states agree they are using outdated figures for the number of people who cross state lines for work.

Lawmakers said they will send their letter to Pawlenty and Doyle within days. It will be authored by Harsdorf, a Republican, and Saltzman, a Democrat, and signed by other border lawmakers.

"We can only try," Harsdorf said of trying to keep a reciprocity deal intact.

Some Minnesota lawmakers said they may introduce legislation in 2010 to address the tax issue, but current law allows the Minnesota governor to back out of the reciprocity agreement without legislative approval.

The income tax agreement is not related to the two states' college tuition reciprocity agreement. However, Harsdorf and Saltzman said other agreements like that one could be at risk in the future if the tax pact ends.

Sen. Steve Murphy of Red Wing said the two states have long-standing agreements on many other issues, from natural resources to transportation. If Minnesota and Wisconsin can agree on fishing regulations, they should be able to find consensus on a tax pact, he said.

"There's no reason why this needs to go by the wayside," Murphy said.

Minnesota state Rep. Roger Reinert, said the end of a tax filing agreement would be a burden of extra paperwork for workers. He said people are aware of the impending change.

"It's a huge issue," said Reinert, DFL-Duluth. "I daily have had people stop me."

Reinert, a freshman lawmaker, said he is "a lot less optimistic" a deal can be reached after learning there only is about three weeks left for the states to negotiate.

"If I learned anything after my first session of the Legislature," he said, "it's that government doesn't turn on a month."

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Number of Minnesotans in select counties who work in Wisconsin and will have to file two sets of income tax forms beginning in 2011 if there is no reciprocity agreement between the two states:

Washington, 1,482

Dakota, 502

Goodhue, 319

Wabasha, 106

Pine, 96

Carlton, 335

St. Louis, 2,015

Number of Wisconsin residents in select counties who work in Minnesota and will have to file two sets of income tax forms beginning in 2011 if there is no reciprocity agreement between the two states:

St. Croix, 13,176

Pierce, 5,709

Pepin, 323

Polk, 3,777

Douglas, 3,777

Source: Minnesota Revenue Department

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