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Lawmakers search for way to restore tax reciprocity

Apart from inconvenience for workers who will have to file in two states, the end of the income tax reciprocity agreement between Minnesota and Wisconsin may have greater implications, say some lawmakers.

"There's a state border there, but we really operate as a region," said Wisconsin state Sen. Sheila Harsdorf, R-River Falls. She said ending this 40-year-old cooperative agreement could jeopardize others.

"Once you lose one, it's easier to watch the others fall apart," Harsdorf said. She said there's a lot of interest among legislators from both states to explore ways to reinstate the reciprocal agreement.

Harsdorf and a Minnesota counterpart, Sen. Kathy Saltzman, a Democrat, are inviting their peers who represent border communities from Duluth to Iowa to a "working session." The intent of the meeting is to "seek a strategy that will lead to the reinstatement of our long-standing and mutually beneficial income tax reciprocity agreement," says the invitation.

The session will begin at 9 a.m. Monday, Oct. 12, at Woodbury City Hall.

"I think it's really hard to change something once you've imposed it," Saltzman said. She said lawmakers want to determine if there is a solution that can be put in place before January 2010.

The Minnesota Department of Revenue announced in September that it will end the tax reciprocity agreement. The change, which goes into effect Jan. 1, means people who live in one state and work in the other must file tax returns in both states.

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 over twice as many Wisconsinites work in Minnesota, Wisconsin always ended 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.

"It's really a concern for our taxpayers," said Harsdorf, because more Wisconsinites work in Minnesota than the other way around.

Still, she said, both states and their taxpayers benefited from the arrangement.

"It's not like either side loses out," said Harsdorf. "It's really more of a convenience for taxpayers."

Saltzman said she has heard from a few constituents who wonder how the loss of the agreement will affect them. Minnesotans who work in Wisconsin want to know whether they will have to pay more taxes, she said.

Others have wondered whether small businesses employing people who live in the other state will be affected, Saltzman added.

One of the issues that will be explored at the meeting is whether, under the now-severed agreement, Wisconsin actually owed Minnesota more than it has paid because more Wisconsin residents are working across the border than in years past, Saltzman said.

Under the process now in effect, Minnesota businesses that employ Wisconsin workers pay state withholding for those workers to Wisconsin and the other way around. After the workers file their tax returns, Wisconsin calculates the amount owed to Minnesota and sends that state its share.

Harsdorf said that while Minnesota will get its tax money earlier starting in 2010, it will lose yearly interest payments of $7 million to $8 million.

Minnesota's commissioner of revenue will attend the meeting, but because Oct. 12 is a mandatory furlough day for Wisconsin state employees, Wisconsin's secretary of revenue can't attend or send a representative, said Harsdorf.

The Wisconsin legislators have asked for a memo from the Legislative Fiscal Bureau.

Editor's note: Woodbury Bulletin Reporter Scott Wente contributed to this report.