A clothing sales tax? If the shoe fits...

Minnesota residents have benefitted from the exemption of clothing from the sales tax base since 1967. However, given Minnesota's $5 billion deficit, some Minnesota legislators are proposing a clothing sales tax (2:20 minute video) in an attempt to raise revenue, expand the tax base, and bypass having to make cuts.

Clothing Tax Comparison

Indeed, of the states that do collect sales taxes, only Minnesota, New Jersey, Pennsylvania, and Rhode Island completely exempt clothing from taxation; Connecticut, Massachusetts, Vermont and New York offer partial exemptions. None of Minnesota’s neighbors exempt clothing from taxation.

Clothing Tax Stack-up

Efficiency
Since all neighboring states impose a sales tax on clothing, it is unlikely that Minnesota residents would travel elsewhere to purchase clothing. The two likely places for distortion would be in internet sales and the potential negative impact on tourism- particularly in border cities and at the Mall of America.

Equity

A sales tax on clothing, especially with regards to smaller purchases, would be highly regressive as it would constitute a greater burden on lower-income households than on higher-income households. And while a $6.875 charge on a $100 purchase (given Minnesota’s 6.875% sales tax) might not seem very great, it represents a significant amount for families that might spend $300 on clothing . Ask anyone who’s had to buy shoes for growing children!

Feasibility

Implementing a clothing sales tax in Minnesota will be highly visible to the public, and grumbles would likely ensue. On the positive side, a clothing sales tax is highly exportable to non-residents. For instance, it is well known that people travel across the country to shop at the Mall of America, so the state will be able to collect revenue from tourist shoppers. The administrative feasibility of enforcing a clothing sales tax is fairly straight-forward. The state already has the administrative capacity to collect sales tax on a variety of products.

Adequacy

If simply looking at these measures to determine if expanding the Minnesota sales tax to clothing would provide to be adequate, then we would say yes. However, at the current rate, the sales tax on clothing is projected to provide $566 million in FY2012-2013. This amount is not adequate to cover the total projected budget deficit, but there isn't one solution that could. Another consideration is the stability of the tax as a revenue source. Generally, the goals of a good tax system are advanced by having broader tax bases and lower tax rates.

Important Considerations

The unique factor to the current legislative proposal on extending the sales tax to clothing, is where that additional revenue is to be directed. In the video below, Senate Tax Chair Tom Bakk, states that the additional monies are to be directed to the Minnesota school fund, in order to increase that pot of money.

Additionally, over the years 2011 – 2013, the tax rate on clothes is to be lowered. By lowering the rate over time, and maintaining the same payment to the school fund, any surplus in revenue will actually have a negative net impact on the General Fund. The state is raising additional revenue through the expansion of the sales tax to clothing, yet lowering its ability to raise revenue by eventually decreasing the tax rate, and therefore negating its ability to successfully be used to fund a specific program, and again creating a deficit.

What do you think? Should MN "fold" on the clothing tax proposal? Why or why not?