Thursday, February 24, 2011

Who really loses out by not taxing clothing?

Minnesota instituted its sales tax in the 1960s at 3%. It currently stands at approximately 6.875% and is among the higher sales tax rates in the country. As noted in class, we have a complex system of taxing various services, yet we have a relatively small tax base because of various exemptions such as no tax on clothing.

Two recent gubernatorial candidates both proposed instituting a sales tax on clothing as a method of addressing Minnesota's looming budget shortfall. That deficit is currently projected at ~ $6.2 billion over the next biennium. Tom Horner proposed expanding the sales tax to clothing while reducing the tax rate by 1%. Horner's proposal predicts that $1.3 billion per biennium could be raised through this enactment. Tom Bakk (whom was not a final gubernatorial contender) proposed extending the sales tax to clothing at its current rate and then lowering the rate over the next few years. He predicts that in the first year $257 million would be collected. After that the rate would be reduced to 6.25% and still produce $120 million dollars.

Former Governor Pawlenty, and others, oppose this extension, arguing that tax free clothing gives Minnesota an economic advantage over other states and spurs more tourism and business through shopping. It's true, we enjoy a distinct advantage of being one of only 5 states that has no sales tax on clothing. And we enjoy a great deal of tourism due in part to this, as the Mall of America (MOA) is one of the country's top tourist attractions. I agree that a full implementation of the sales tax to clothing would decrease the attractiveness of the MOA, particularly on a global scale, but would the increase in that tax base for state potentially not offset this loss? I imagine that if the rate is still lower than in other states, the other qualities of the MOA that draw people to it would still encourage tourism. I think a better solution would be to consider establishing the tax rate on clothing at a lower rate than the general sales tax, say at 3%. This would be substantially lower than many other states, yet increase the revenue base for Minnesota.

Many also argue that broadening the sales tax would only further regressivity. As noted in Kelly's post below, some believe that not taxing clothing actually benefits the wealthy more than those with a low income. Instituting the clothing sales tax at a lower rate, as suggested above, could further contribute to lessening the regressive nature of sales tax. We could also consider only taxing certain items of clothing, or charging a higher rate of tax on "luxury clothing". Selective taxing on clothing and a luxury tax may help in equity, but it may also be administratively unfeasible to implement.

It is clear that Minnesota is at a critical point in considering her revenues and expenditures. I think it has been made clear that simply cutting services will not balance a budget. Expanding the sources of revenue for the state by means of implementing some sort of sales tax on clothing may be an instrumental part of the solution.

1 comment:

  1. I agree that charging higher rate of tax on luxury clothing.