The State of Minnesota has decided to end its income tax reciprocity program with Wisconsin, effective Jan. 1, 2010.

As a result of the end of the agreement, Minnesota residents who work in Wisconsin will be required to file returns in both states next year.

Termination of the reciprocity agreement will impact about 13,000 Minnesotans and 33,500 Wisconsin residents who meet the filing requirements and work across the border, the Minnesota Department of Revenue estimated. No Minnesota resident will pay more in Minnesota tax, but some who work in Wisconsin will pay more Wisconsin taxes.

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

In June, Minnesota Governor Tim Pawlenty announced a plan to receive more timely reimbursements from Wisconsin to help balance the budget, but the two states have been unable to reach agreement on a modified timetable. 

As a result, the Minnesota Department of Revenue is terminating the program, and the reciprocity provisions will no longer apply to cross-border workers for income earned beginning January 1, 2010. 

Repealing the agreement will generate an estimated $131 million in revenue over two years: $43 million in fiscal year 2010 and $88 million in fiscal 2011.

“Because of the delay in payments from Wisconsin to Minnesota, this agreement no longer serves the best interests of our state,” said Revenue Commissioner Ward Einess in a statement. 

Reciprocity was enacted in 1968 for taxpayer filing simplification and was never intended to reduce taxes for cross-border workers, the Minnesota Department of Revenue noted, adding that technological advances such as electronic filing have significantly reduced the burden of filing since 1968.

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