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State Rep. Roger Reinert of Duluth, left, on Monday said a severed income tax reciprocity agreement between Minnesota and Wisconsin would work against regional economic efforts of Duluth and Superior. Legislators from Minnesota and Wisconsin gathered to discuss the agreement. Without it, nearly 50,000 people working across state lines will have to file income tax returns in both states, not just their home state, beginning in 2011. Tribune photo by Scott Wente

Lawmakers: Workers will suffer greatly without a tax agreement between Minn. and neighboring Wisconsin

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WOODBURY -- Legislators from Minnesota-Wisconsin border communities said thousands of workers will suffer if the states cannot restore an income tax filing agreement.

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A group of lawmakers who discussed a tax reciprocity agreement set to end this year said Monday that they will draft a letter to Govs. Tim Pawlenty of Minnesota and Jim Doyle of Wisconsin urging continued talks ahead of a Nov. 1 deadline.

Without an agreement, some 46,000 people working across state lines will have to file income tax returns in both states, not just their home state, beginning in 2011.

"It's about convenience to the taxpayers," said Wisconsin state Sen. Sheila Harsdorf of River Falls.

"It's a convenience issue, but longer term it's, 'How do we develop the concept of a regional economy?'" added Minnesota state Sen. Kathy Saltzman of Woodbury.

Pawlenty announced last month his state would back out of the tax agreement, in place since 1968. Since more Wisconsin residents work in Minnesota, Wisconsin long has sent payments to Minnesota. The Pawlenty administration wanted to speed up those payments to help balance Minnesota's books for the budget period ending June 2011.

As talks ended earlier this fall, Minnesota was seeking an accelerated payment of $72.5 million from Wisconsin, Minnesota Revenue Commissioner Ward Einess said. He said Minnesota would be willing to continue the agreement if the two states agree on a new payment schedule, but that must happen by Nov. 1 because employers need time to prepare tax information before January.

Failure to reach an agreement could affect Minnesotans and Wisconsin residents in a number of ways.

Residents from the two states who earn taxable wages across the border work will have to file income tax statements in both states. Minnesota revenue estimates show that includes 13,000 Minnesotans and 33,500 Wisconsin residents.

Bob Lang, Wisconsin Legislative Fiscal Bureau director, said some Wisconsin residents working across the border also will pay more in taxes, but there is not an estimate on how many people are affected. One-third of Minnesotans working in Wisconsin will pay more in taxes.

Those workers will pay more because the states' tax laws are different.

Also, Lang said, residents who have a business, such as a farm operation, in their home state but work across the border will not be able to deduct their business losses from their income earned in the neighboring state. Reciprocity allowed that.

"It sounds like it's going to be just a windfall for accountants in the next tax year," said Wisconsin state Rep. Kitty Rhoades, R-Hudson.

Pawlenty, a Republican, and Doyle, a Democrat, have discussed the issue multiple times in recent months. Einess and Wisconsin Revenue Secretary Roger Ervin also tried to negotiate new reciprocity terms. The tax pact has been threatened at times over the past several decades, Einess said.

Each state has concerns that complicate negotiations. Wisconsin wants to change how it is assessed interest for tax collections owed Minnesota, and both states agree they are using outdated figures for the number of people who cross state lines for work.

Lawmakers said they will send their letter to Pawlenty and Doyle within days.

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