See more of the story

Minnesota and Wisconsin are back negotiating a proposal to simplify income taxes for those who live in one state and work in the other.

Minnesota revenue officials on Thursday offered to lower Wisconsin's annual payment by $1 million if the Badger State approves of the agreement by Sept. 30.

"That million dollars is part of Minnesota's strong desire to reinstate income tax reciprocity," said Sen. Roger Reinert, a Duluth Democrat. "This really is us extending a hand and saying, 'Work with us.' "

Wisconsin and Minnesota have been unable to broker a new arrangement ever since the 40-year-old income tax reciprocity agreement lapsed at the end of 2009. Suddenly, 80,000 residents who lived in one state but worked over the border had to file income taxes in both states.

The deadlock has come down to money.

About 56,000 Wisconsin residents work in Minnesota — more than double the number of Gopher State residents who cross the border for work.

A Minnesota study concluded that Wisconsin needs to pay about $92.5 million a year because of the difference.

But that's $4 million to $6 million more than Wisconsin officials think they should pay. They blame a Minnesota tax credit that they say puts their residents at a disadvantage.

"We are glad Minnesota's ransom has come down $1 million from its original $6 million, but it's not right for Wisconsin to pay to undo a tax increase Minnesota imposed on its citizens when it ended reciprocity," said Jennifer Western, a spokeswoman for the Wisconsin revenue department. "If they eliminate that particular payment, we can get reciprocity back ASAP."

Minnesota Department of Revenue Commissioner Myron Frans said the new deal would cost Minnesota money, and Minnesota taxpayers should not subsidize Wisconsin's higher effective tax rate.

Minnesota made similar offers in 2012 and 2013, but both offers included a multimillion-dollar gap. Wisconsin officials rejected both proposals.

"It really is a desire on the part of border legislators who are trying to make it a little smoother," Frans said.

Wisconsin state Sen. Sheila Harsdorf, R-River Falls, said Minnesota's insistence on the additional millions is "an agreement killer."

She said Wisconsin officials have complied with every other agreement, but that accepting the new proposal would be "subsidizing Minnesota's tax policy."

Reinert, Harsdorf and other border legislators said they still routinely hear from residents frustrated by having to file two state income tax forms.

Reinert said business owners are just as frustrated that they have to keep two sets of tax records for employees who live across the border.

The issue boiled over in 2009 as the economy tanked and budget officials in both states were desperate for money.

Wisconsin's slow payments created a deeper hole for Minnesota's budget officials.

Then-Gov. Tim Pawlenty grew frustrated and let the program expire, saying that Wisconsin's 17-month delay was too much.

The proposed agreement allows Wisconsin to make four equal payments a year, minimizing one-time blows that can be difficult in a sagging economy.

For state leaders, the issue has become a balance between protecting state money and promoting convenience for taxpayers.

Frans said the governor authorized the new $1 million offer, but they refuse to make a deal unless it is fair for all Minnesota taxpayers.

Minnesota still has reciprocity agreements with Michigan and North Dakota.

Baird Helgeson • 651-925-5044