Lawmakers, retailers consider effect of sales tax on clothes

As Minnesota lawmakers once again find themselves facing a projected budget shortfall, some of the first bills they are looking at would extend the state sales tax to clothing.

Supporters say that taxing clothes could help stabilize sales tax revenue and could bring in enough money to offset lowering the overall sales tax rate. Critics worry that retailers would lose a competitive advantage if Minnesota joins the vast majority of other states that tax apparel sales.

All but seven of the 50 states tax clothing sales, and the idea of extending the sales tax to clothing in Minnesota has been proposed many times in the Legislature.

State Sen. Ann Rest, DFL-New Hope, is trying again this session. Rest said she is not trying to raise more sales tax revenue. Instead, she said including clothing in the sales tax would make it more reliable and help move the state off the cycle of budget shortfalls and surpluses.

"We hear from economists that broad-based taxes with low rates are a way of achieving a stable tax system," she said.

Rest has introduced two competing sales tax bills. One would impose the tax on single apparel items that cost more than $200. The other would extend it to all clothing. That second bill would also provide tax credits for what Rest calls Minnesotans of "modest" income, but she has not spelled out the specifics.

When Rest proposed taxing clothing sales a few years ago, officials concluded the broader sales tax would bring in enough money to lower the 6.875 percent tax rate by half a percentage point and pay for the tax credits.

Regardless of how it might be done, many retailers oppose a tax on clothing. The people who run the Mall of America say that apparel accounts for more than half of the sales at the mall and that shoppers cite tax-free clothes as one of the top three reasons they go there.

The Mall of America isn't the only business that benefits from Minnesota's tax-free clothing sales, said Bruce Nustad, president of the Minnesota Retailers Association.

"Any clothing retailer will tell you that there's a great marketplace advantage that they enjoy right now from a very positive perspective relative to not having that tax," he said.

Anthony Andler, the proprietor of the upscale clothier Heimie's Haberdashery in downtown St. Paul, said charging sales tax on clothing would cut into his local and out-of-state business.

"People are aware of what's coming out of their pockets, and if they've got to come in here and spend an extra 7, 10 percent taxation on their clothing, they're probably not going to buy that extra pair of socks or if they're going to buy three ties, they're going to buy one tie," Andler said. "If they're going to shop here five times a year, maybe it will go down to three times a year."

Despite opposition from retailers, Joseph Henchman, a policy analyst for the nonpartisan Tax Foundation in Washington, D.C., said including more items in the sales tax makes sense, especially if the overall sales tax rate can be reduced.

As for Minnesota losing its competitive edge, Henchman said that Minnesota retailers are already at a disadvantage because of the relatively high sales tax rate. He said they could end up benefiting from a broader, lower sales tax.

"Something Minnesota does have to worry about is its sales tax is higher than its neighbors," Henchman said. "When you include local taxes, it can be over 7 percent, and all of Minnesota's neighbors ... you have to get as far as Illinois before you get a state with a higher sales tax. So options that broaden the tax base but can potentially lower the rate -- I feel like that might be something Minnesota ought to be looking into."

Rest said she is optimistic that her latest effort to start taxing clothing sales will attract support. But at least for now, DFL Senate leaders are not embracing her renewed sales tax pitch.

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