Minnesota officials rejected a proposal from Wisconsin lawmakers last week that would have reinstated the income tax reciprocity agreement between the two states, previously in effect since 1967.

The past agreement allowed residents who lived and worked in both states to file a single tax return in their home state. Since Wisconsin has more residents who work in Minnesota, Wisconsin then reimbursed Minnesota for the income tax it collected.

Minnesota Gov. Tim Pawlenty ended the agreement last September, following concerns over the amount of time it took for Wisconsin to send payments, as well as Minnesota’s current budget shortfall. The termination will go into effect on Jan. 1, 2010.

The new proposal to reinstate the reciprocity, presented by Sen. Sheila Harsdorf, R-River Falls, and Rep. Ann Hraychuck, D-Balsam Lake, would have set up an accelerated payment schedule between Wisconsin and Minnesota.

In addition, the proposal would have designated funding for a study to calculate what the reciprocity payments would need to be in future years. The final stipulation of the proposal said either state could end the reciprocity agreement but had to first provide written notice at least a year in advance.

Hraychuck said she and Harsdorf presented the proposal to Minnesota Commissioner of Revenue Ward Einess on Wednesday through a videoconference. Einess rejected the proposal, however, referencing budgetary concerns.

“We were very grateful Minnesota came back to the table, but it didn’t turn out how we wanted,” Hraychuck said. “We were very disappointed it was turned down.”

Hraychuck said lawmakers decided to create the proposal because the former tax reciprocity agreement was a convenient and financially beneficial arrangement for numerous residents of both states.

“When [both governors] stopped negotiating, we stepped in,” Hraychuck said.

According to Hraychuck, the rejection had much to do with Minnesota’s current financial difficulties. Einess told Hraychuck and Harsdorf he had just received an updated financial statement for Minnesota that put the state $1.2 million more in debt than their last projection said.

By terminating the reciprocity agreement, Einess told Hraychuck Minnesota stands to make $131 million in tax payments in the next fiscal year.

Hraychuck added Einess said if the legislators had presented the proposal earlier in the summer, Minnesota might have still been willing to make a deal, but at this point, it was too late in the year.

Hraychuck said the issue seems to have hit a dead end for now, and there is not much hope for bringing the program back in the immediate future.

“At this point, the only thing we can hope for is, after both governors are out of office, we might be able to make another reciprocity deal,” Hraychuck said. “When they finish their terms, we’ll look at the overall program again.”

Pawlenty’s office did not return calls as of press time.