Revenue head holds out little hope for quick return of tax reciprocity
Wisconsin residents who work in Minnesota and are hoping for a break from the expense and inconvenience of filing income tax returns in both states are out of luck unless Gopher State officials change their stance.
Because the states must give employers notice of withholding well ahead of the start of a tax year, reciprocity won’t be in effect for taxes withheld in 2014, said Wisconsin Revenue Secretary Richard Chandler during a Monday morning visit to River Falls.
Chandler said his department did the two things the other state demanded to reinstate reciprocity and then Minnesota changed the rules.
He said Minnesota, which has been raising taxes while Wisconsin has been lowering them, is demanding a $6 million “ransom” to reinstate the reciprocity policy that was in place for 41 years before Minnesota’s former governor, Tim Pawlenty, scrapped it in 2009.
“For most people, the dollar amount worked out the same either way,” Chandler said. “It’s just that they have the inconvenience of filing two tax returns rather than one.”
Chandler and Deputy Revenue Secretary Jack Jablonski, former chief of staff to state Sen. Sheila Harsdorf, stopped in River Falls ahead of a moderated conversation on the two states’ tax approaches scheduled for noon Monday at the Humphrey School of Public Affairs in Minneapolis.
“It should be interesting because we really are taking diametrically different approaches to taxing,” said Chandler of the Humphrey forum.
He said Wisconsin is reducing, and Minnesota is increasing taxes.
Gov. Scott Walker has made about $1.4 billion in tax cuts, including decreases in personal income taxes, Chandler said.
“We think we’re really headed in the right direction,” the revenue secretary said. “Minnesota is headed in the wrong direction.”
He claims even some Minnesota lawmakers have buyer’s remorse.
“In Minnesota, legislators aren’t bragging about what they did” when faced, as other states were, with revenue shortages, Chandler said.
Under reciprocity, employers in one state would withhold taxes from paychecks of their workers who live in the other state and send the money to the employee’s state of residence. Once tax returns were filed, the two states settled up.
Because more Wisconsin residents worked in Minnesota than the other way around, Wisconsin always ended up owing Minnesota.
Even though Wisconsin paid interest for the lag time, Pawlenty looked at the delay as a cash-flow problem and cancelled reciprocity.
At first, said Chandler, Minnesota asked for two things: That Wisconsin settle up sooner and for new benchmark studies to determine the exact number of workers crossing state lines for jobs and an updated projection on what each state would owe the other.
Those studies showed that about 56,000 Wisconsinites work in Minnesota and about 24,000 Minnesotans worked in Wisconsin. The two revenue departments were also very close to agreeing on the amount Wisconsin would owe Minnesota, Chandler said.
“We thought OK, fine, we can get reciprocity back in place,” he said.
Then, said Chandler, Minnesota added a third issue and refused to give Minnesotans full credit for taxes paid in Wisconsin. That resulted in a $6 million difference.
“They’re now saying to us, ‘We want you to make up that $6 million,’” Chandler said. “In our view that’s a ransom.”
The $6 million, he said, is to cover a tax increase Minnesota imposed on its taxpayers.
Some have asked if Wisconsin couldn’t compromise.
“We were compromising. We were completely agreeing to their request,” Chandler said, but Minnesota changed its request.
Minnesota has tax reciprocity with other states and doesn’t require the same of them, Jablonski said.
Chandler said Minnesota’s Commissioner of Revenue Myron Frans doesn’t want to lose any money on the deal and is more concerned about the state’s treasury than its taxpayers.
“I’ve called that the treasury-centric approach rather than the taxpayer-centric approach,” Chandler said.
He said reciprocity is a big issue whenever he visits this part of the state, “and Jack reminds me of it every time we’re in western Wisconsin.”
Jablonski, a UW-River Falls graduate, worked for Harsdorf in 2009 when the reciprocity issue exploded.
“She’s incredibly persistent. She has never let go,” said Jablonski, adding that Harsdorf recognizes Minnesota’s stand is “basically unreasonable.”
Chandler said as he talks to economic development and business groups in Wisconsin, they also agree that Minnesota’s demand is unreasonable.
“We wish they would look at it from the taxpayer’s point of view,” Chandler said.
He said the income tax is part of a larger strategy.
Chandler said Wisconsin has focused on reducing tax rates of various sorts to improve its business climate and attract more employers, while Minnesota has not.
“Their trend (on taxing) is up. Our trend is down,” he said.
As a result Wisconsin economic development groups have been getting a lot of contacts from Minnesota businesses interested in moving here, Chandler said.
He said Wisconsin, which had a reputation for having high taxes, is now getting to the point where it can say its tax structure is competitive.
“We’re moving from where taxes are a negative to where they’re neutral or a positive,” Chandler said.