People come to Minnesota from all over the region to buy clothing, in large part because the state charges no sales tax on clothes.
But now two state lawmakers from opposite sides of the aisle at the Capitol have introduced bills that would repeal that exemption. In exchange for that unpopular move, they would cut the sales tax rate for all taxable items.
"Monies from the sales tax are shrinking," State Representative Ron Erhardt, a Republican from Edina, told KARE 11.
"This would be a way to broaden the base we tax on and reduce the rate as a matter of fact."
Erhardt's bill would repeal the sales tax exemption clothing currently enjoys, and at the same time reduce the rate on all items from 6.5 percent to 5.96.
The competing sales tax reform bill from Brooklyn Park Democrat Melissa Hortman would lower the state sales tax rate to 4.5 percent. It would tax clothing, plus a long list of services and some food products.
Both Erhardt's and Hortman's plans offer income tax credits to lower income Minnesotans, to help offset the expected blow. The thinking behind the original exemption is that clothing, like food, isn't a discretionary expense.
Cool reception from retail
Retailers clearly don't like the idea of anything that will make clothing less affordable. Especially places that derive a good deal of business from out-of-state shoppers.
"A lot of people will come here just because they're getting a 7 or 8 percent savings because they don't have to pay a sales tax," Jim Fritz of the Wedding Shoppe on Grande told KARE 11.
And Fritz says it's not just his business that benefits from those brides-to-be from other places. There's a spin-off effect.
"We have hundreds of brides every year that are tourists. It's a destination business. They're shopping here, they're spending money at local restaurants, going to the Mall of America and other places."
Fritz wonders how long consumers would enjoy the benefits of a lower overall rate.
"My question is how is it before the tax is just increased on all the good again?"
At the Mall of America, the owner of GLITZ!, a high-end prom shop, is also concerned.
"It'd be absolutely deadly," MaryAnne London says. "We're more than happy to pay our share, but I think that's a huge selling point for coming to Minnesota is we don't have tax on retail."
KARE 11's Joe Fryer dug up these statistics on Wednesday.
The average American household makes $58,712 per year (before taxes), according to the U.S. Department of Labor's Bureau of Statistics.
The average American family spends $46,409 per year.
The average American family spends roughly $1,800 per year on "apparel and services" (according to federal stats), which in Minnesota would mean an additional $110 more in sales taxes per year. (However, it might be less because dry cleaning is a service, but it already falls under the sales tax in Minnesota.)
But according to the Minnesota Department of Revenue, the average Minnesota household spends $1,035 a year on state sales tax. So that household would save about $95 per year with the lower sales tax on other items.
Again, these are all averages. In short, it's fairly close to a break-even proposition.
Legs on a stool
The estimated $400 million the state would collect by taxing clothing sales wouldn't be extra money to spend solving the short-term budget shortfall, according to the veteran lawmaker. The net effect would be a wash, or a "revenue neutral" bill, as they say in the fiscal parlance under the Capitol Dome.
The money gained by taxing apparel would be offset by the revenue lost by lower the sales tax rates across the board.
"It has nothing to do with the deficit," explained Erhardt, "Just as a matter of tax policy it's something we should be talking about."
So why do it? Because when future legislatures raise sales taxes they'll be taxing a larger pool of items, getting more from that source.
Erhardt asserts that traditionally sales taxes, property taxes and income taxes were "three legs of the stool" all carrying one-third of the load for funding government. Because of sagging sales tax revenues, he says property taxes are now bearing a disproportionate share.
"We got to start talking about this because right now our property taxes have moved ahead of the sales tax on the monies they raise."
Bikers chapped by idea
As it happened the motorcycle riders group ABATE of Minnesota rallied at the Capitol Wednesday, so we asked several leather-clad bikers to weigh in on the idea of paying more for their threads.
"The safety goes away because you can't afford it," offered Rondi Lund who was wearing leather pants and a Harley Davidson jacket.
"This jacket has the extra padding for safety, so it's a good $500 or $600."
Keith "Smoker" Efron stood by and admitted his riding outfit a major investment.
"Oh I've got a good thousand dollars on me at the moment," remarked Efron, "And when I go down to my bike I'll put on a few hundred more."
But Efron, who rode in from Breezy Point on a chilly February day, said paying sales tax on his gear wouldn't bother him if it's solving a problem.
"We need the revenue, and clothes don't make up that much."
Chuck Anderson added, "Because I like to ride I would still pay the tax of course but probably reluctantly."
But to Rondi Lund it's a major chunk of change she can't really avoid.
"Because unless you want to go out naked, and you'll get held up for that! You have to spend money on clothes."
Representative Erhardt says he realizes it won't happen soon, but he wants to get the conversation going in the Legislature to bring some fiscal stability.
"I don't know if mine's a good idea," said Erhardt, "But that was the lowest we could come in at and the biggest pot of money readily available. So let's start here and start talking about it. ...
"I certainly don't want to be tagged with raising taxes!" Erhardt laughed, "After this last mess with the transportation bill."
Erhardt was one of six Republicans who crossed party lines to support the highways bill which increased gas taxes, license tab fees on new cars, and sales taxes in the Metro area.
(Copyright 2008 by KARE. All Rights Reserved.)