Gov. Tim Pawlenty is using an emergency provision to balance the books on his own through spending cuts and accounting shifts that begin July 1. One piece of the plan relies on Wisconsin agreeing to a faster payback of income tax revenue owed to Minnesota. But Wisconsin officials, who've been struggling with budget problems of their own, have not yet responded to the request.
Minnesota and Wisconsin have had a tax reciprocity agreement in place since 1968. It allows residents who cross the border for work to pay income taxes in only their home state rather than both.
State officials say 57,000 Wisconsin residents work in Minnesota, more than twice the number of Minnesotans who work in Wisconsin. Wisconsin makes up the for the disparity with annual payments to Minnesota of more than $100 million. But Gov. Pawlenty said the current 17-month delay for those payments is just too long.
"It's a convenience factor for the taxpayers, so that's a good thing and we'd like to preserve it," Pawlenty said. "But it's unreasonable, when this much money is involved, to have the settle up be 17 months after the fact."
“If we couldn't reach a mutually agreeable settlement on the payments ... we'd have to consider repealing reciprocity.”Ward Einess, Minnesota Revenue Commissioner
Pawlenty said Minnesota would gain about $106 million if Wisconsin settles up within the same fiscal year that the taxes are paid. That amount was included in his broader plan for balancing the budget through an emergency power known as unallotment.
Pawlenty's plan kicks in Wednesday, but so far there's only been very preliminary discussions between the two states. Minnesota Revenue Commissioner Ward Einess said a meeting with his Wisconsin counterpart might be scheduled as soon as next week.
"If we couldn't reach a mutually agreeable settlement on the payments, the governor does allude to the fact that we'd have to consider repealing reciprocity," Einess said. "It's not our preference obviously, but it's a consideration we'll have to take seriously. That reciprocity agreement, if we were to repeal it, it would make sense to repeal it as of Jan. 1, 2010."
A repeal would mean more paperwork and a potentially higher tax rate for border-crossing taxpayers. But Einess said Minnesota would actually do better by about $30 million if Wisconsin residents started paying Minnesota taxes compared to the formula for reimbursement in the current agreement. Still, Einess said he thinks the two states can find a way to speed up payments and avoid a repeal.
"There's far more in Wisconsin that would be disadvantaged or inconvenienced if reciprocity went away," he said. "So I think it's in both states best interest to try to work out this payment schedule."
DFL House Speaker Margaret Anderson Kelliher of Minneapolis, who's been critical of the entire unallotment plan, said she finds it ironic that Gov. Pawlenty is demanding faster payment from Wisconsin at the same time he is delaying payments to Minnesota school districts. Kelliher said she's also concerned the unresolved reciprocity issue will leave a lingering budget deficit.
"If Wisconsin does not come through then we have another hole in this budget," Kelliher said. "And it would have an effect on some of the future discussions here in terms of either Gov. Pawlenty doing further unilateral action to unallot or needing legislative action next year."
The office of Wisconsin Gov. Jim Doyle did not return a phone call. A spokeswoman for the Wisconsin Department of Revenue would only say the reciprocity matter was still under review.