Minnesota pulls plug on Wisconsin tax reciprocity

The Minnesota Department of Revenue has announced it will end its tax reciprocity agreement with Wisconsin.

The decision, which goes into effect on Jan. 1, 2010, means that people who live in one state but work in the other will have to file tax returns in both Minnesota and Wisconsin.

The change affects 13,000 Minnesotans, and 33,500 Wisconsin residents. No Minnesota resident will pay more in Minnesota tax, but some who work in Wisconsin will pay more Wisconsin taxes, according to the Revenue Department.

The reciprocity agreement has allowed residents who cross the border for their jobs to pay income taxes in their state of residence, and the state governments settle up the tax payments at a later date.

Because there are more than twice as many Wisconsin residents who work in Minnesota, Wisconsin reimburses Minnesota for the income tax it collects from Minnesota workers. However, the payments are made about 17 months after the taxes are collected.

Gov. Pawlenty wanted Wisconsin to agree to a faster payback of the tax revenue, and was banking on the savings as part of his plan to balance the state's budget.

The Minnesota Department of Revenue said in a news release that the two states negotiated, but could not resolve their differences, so officials decided to end the 41-year-old agreement.

Revenue officials say the decision means Minnesota will generate $131 million more in the 2010-2011 budget cycle, since more Wisconsin residents work in Minnesota.