Minnesota and Wisconsin Spar over Cross-Border Income Taxes

January 25, 2011

Americans who live in one state and work in another enjoy the benefits of interstate competition, but can also face the downside if states push hard at exporting tax burdens to non-residents.

In some areas, states have reached agreements not to slap income taxes on another state's residents, with the understanding that the additional hassle of multiple tax returns and the administrative and compliance costs for what is probably a revenue wash would harm the benefits of productivity and mobility.

But as Americans get increasingly mobile, and more jobs can be performed anywhere in the country, aggressive state collection efforts can start interfering with a working national economy. We see a glimpse of that in a dispute between Minnesota and Wisconsin, as reported by the Milwaukee Journal-Sentinel:

Since 1967, Minnesota and Wisconsin had a deal that allowed residents who live in one state but work in the other to file a tax return only in the state where they live. But Minnesota Gov. Tim Pawlenty withdrew from the deal because he said Wisconsin was too slow to make payments.

The deal was terminated for the 2010 tax year, and this April 15 will be the first time taxpayers who commute from one state to the other will have to file two state returns.

The situation affects about 57,000 Wisconsin taxpayers and 22,000 Minnesota taxpayers.

Wisconsin has been sending Minnesota money after each tax year because more people live here who work in Minnesota than live in that state and work in Wisconsin.[...]

Wisconsin was supposed to pay Minnesota $58 million by December 1, 2010, but didn't. Minnesota is now charging interest and pressing for payment. It's interesting to note that Minnesota has apparently become more attractive as a place to work relative to Wisconsin, when previously they were more on par.

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