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Effort renewed to extend Minnesota sales tax to clothing

ST. PAUL - 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 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. It could particularly hurt stores on state borders, such as those in Moorhead.

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's 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 hasn't 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 apparel accounts for more than half of the sales at mall and that shoppers cite no sales tax on clothes as one of the top three reasons they come 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.

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

"People are aware of what's coming out of their pockets, and if they go 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. "You know what I mean? 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 sales tax makes sense, especially if the overall rate can be reduced.

As for Minnesota losing its competitive edge, Henchman said Minnesota retailers are already at a disadvantage because of the relatively high sales tax rate, and that 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, noting that the nearest state with sales tax as high as Minnesota's is Illinois.

Rest said she's optimistic her latest effort to start taxing clothing sales will attract support. But at least for now, DFL Senate leaders are not embracing the proposal.