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Expanding sales tax to clothing and services tempts Dayton

Expanding sales tax to clothing and services tempts Dayton
REUTERS/Andy King
Extending the sales tax to clothing would generate more than $330 million a year in additional revenue.

When members of the Minnesota Legislature’s new DFL majority convene in January, they will be under immediate pressure from their constituencies to latch onto new sources of state revenue.

Not only will they have to erase a projected $1.1 billion budget shortfall for the coming two years. But they also will have to deliver on campaign promises to fully repay the $2.4 billion in school aid shifts used to help balance previous state budgets, as well as to boost state funding for education, transportation, property tax relief and other programs.

Call it a fiscal crevasse.

For DFLers, one likely source of revenue is DFL Gov. Mark Dayton’s past proposal to raise income taxes on the state’s more affluent residents. Apart from its impact on small business, there’s not a lot of political risk for most DFLers.

Another revenue source could be the expansion of Minnesota’s 6.875 percent sales tax to clothing and consumer services, such as computer, legal, accounting and auto-repair services.

State Revenue Commissioner Myron Frans told me that this option is being examined “very closely” for possible inclusion in the tax and budget plan the governor will offer in January.

In the past, several leading DFL legislators – including incoming House Speaker Paul Thissen of Minneapolis and Senate Majority Leader Tom Bakk of Cook – have expressed interest in the idea of expanding the state’s sales tax base.

Past proposals

This idea has been kicking around the Capitol for nearly three decades:

  • In 1986, a tax study commission appointed by Gov. Rudy Perpich and headed by St. Paul Mayor George Latimer proposed extending the sales tax to clothing and services, saying that it would add “revenue stability” to the sales tax and actually make the tax less regressive.
  • In 2001, a tax study led by Matt Smith, revenue commissioner under Gov. Jesse Ventura, recommended extending the sales tax to services and using the additional revenue to reduce the tax rate – at the time 6.5 percent – to 6 percent. Smith and his staff were considering recommending that clothing also be taxed, but Ventura took the idea off the table.
  • And in 2009, a panel appointed by Gov. Tim Pawlenty recommended extending the sales tax “to a broader range of consumer products and consumer services,” without specifying which ones.

The current tax law is a relic of earlier times and consumer spending patterns. In 1950, consumer goods accounted for 61 percent of retail sales and services for 39 percent. Today, the figures are reversed, with services accounting for 67 percent of retail sales and consumer goods for just 33 percent.

Of the 45 states and the District Columbia that have a sales tax, all but five states now impose the levy on the purchase of clothing. Many states also tax services.

“We do have a very narrow [sales] tax base in Minnesota,” Frans says. “As a consequence, we have a high tax rate. It’s the highest in our region.”

Currently, Minnesota ranks 21st among all states in sales tax collections per capita, but just six states have a higher tax rate than Minnesota’s 6.875 percent.

Midwest sales tax rates
Research Department of the Minnesota House of Representatives

The many exemptions in Minnesota law also produce tax inequities and marketplace distortions. For example, women who do their own hair styling pay sales tax on the products they use, while those who patronize a hair salon do not.

“Generally speaking, the broader the tax base and the lower the rate, the better off you are,” says Mark Haveman, executive director of the Minnesota Taxpayers Association. “It reduces the distortions and allows you to obtain revenue without creating economic mischief with purchasing behavior and things of that nature.”

For the governor and legislators, expanding the sales tax is a tempting source of new revenue. Extending the sales tax to clothing would generate more than $330 million a year in additional revenue, and extending it to selected consumer services would bring in another $485 million annually, according to the state Revenue Department.

If policymakers wanted to make the change revenue-neutral, they could reduce the tax rate by nearly a full percentage point. Frans indicated one option he is examining is using part of the revenue for rate reduction and part for new spending priorities.

Expanding the sales tax to clothing and services has always proven to be a hard sell, even if it is coupled with a rate reduction. “We have such a rich history of not taxing clothing and services,” Haveman says.

Minnesota Sales Tax Rate
PeriodRate
August 1, 1967 – October 31, 19713.0%
November 1, 1971 – June 30, 19814.0%
July 1, 1981 – December 31, 19825.0%
January 1, 1983 – June 30, 19916.0%
July 1, 1991 – June 30, 20096.5%
July 1, 2009 – Present6.875%

Research Department of the Minnesota House of Representatives

Opposed by retailers

Such a proposal would likely draw opposition from retailers as well as consumers. Bruce Nustad, president of the Minnesota Retailers Association, says his group now is reviewing a proposed policy statement opposing the taxation of clothing.

Retailers question the wisdom of “reducing consumers’ disposable income as a result of increased taxes on clothing, especially given our current economy,“ Nustad says.

In addition, he says, “Retailers know they operate in a global marketplace, including competing against online retailers out of state. Expanding the sales-tax base on clothing in Minnesota puts local employers at a further disadvantage to their online counterparts who are not required to collect and remit sales tax currently.”

Expanding the sales tax to clothing also would transform one of the few tax advantages enjoyed by Minnesota retailers into a disadvantage. Minnesota’s border states all tax clothing, but they also have lower sales-tax rates than Minnesota.

Bill Blazar, senior vice president of the Minnesota Chamber of Commerce, says the business community will be watching for Dayton’s tax reform proposals to see how they mesh with his avowed goal of stimulating the creation of new jobs.

“I suspect that the governor’s tax reform proposals are going to include a healthy dose of tax increases,” Blazar says. “I’m not sure how you get to a tax system that encourages job creation if you are going to add several hundred million dollars in new taxes.”

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Comments (16)

Let's not forget the disadvantage to the poor

Not taxing necessities like food in grocery stores and clothing is one of the things that keeps Minnesota's over all taxes progressive. Although they are less progressive than they use to be.

One more strategy for getting out of this mess by over taxing the poor and middle class is not a good strategy.

Expanding sales taxes to services makes sense but it is just a pass through cost to clients. Some thought should be given to what services are taxed. Medical and dental care are essential services like food and clothing, a six day health spa trip is not. Veterinary care is essential, grooming is not. Some consideration should be given to service categories so that the burden of the tax like the existing sales tax is progressive.

Oh, please…

There's no data suggesting a causative relationship – or even a correlation – between sales tax rates and job creation. Mr. Blazar's rhetorical needle is stuck in the groove of long-disproven right-wing rhetoric.

Making sales tax proposals “revenue-neutral” is pointless. The state desperately needs MORE revenue, not just more of the same. Past legislatures have stolen huge sums from school districts across the state as a result of mindless right wing dedication to the idea that there is, somehow, somewhere, a free lunch, and that, despite easily measured inflation, not to mention population growth and other drivers of public expense, we should expect the same or better services for less money. Oddly enough, their solution – spending cuts – never seems to apply to tax expenditures like business subsidies and tax exemptions. Instead, the focus seems always, relentlessly, to be on decreasing or removing state services that benefit people who are neither wealthy nor businessmen. Rhetoric about “free markets” is laughably hypocritical in the face of preferential treatment for business interests.

As an old guy of modest means, I'd like that free lunch myself, and I'd like to be exempted from taxes of all kinds just because I've managed to live this long, because, by living this long, I've created jobs for people who perform services for me. Hey, if businesses can use that line, why not senior citizens?

Unfortunately, that's not the real world, and I use highways, public transit, and the usual assortment of state and local services just like everyone else. Since it doesn't appear that I'll be able to live out my days tax-free, I WOULD like to see the state's “3-legged stool” of revenue move back toward something approaching balance between/among the usual sources of revenue. Currently it leans in the direction of property taxes. Higher taxes on higher incomes and an extension of the sales tax might make that lean less dramatic.

Does not having a sales tax on clothing draw consumers to Minn?

My impression is that a number of people from other states and countries head to MOA to shop. One reason being that there is no sales tax on clothing. Will imposing a sales tax on clothing decrease shoppers that come here and spend money on other things? Maybe the net gain in revenue will offset the loss, but it would be useful to have more information. In general to avoid paying sales tax, I buy all my clothing in Minnesota unless it is something I cannot get here.

Sales tax on clothes might bring less visitors to state

Cameron, you have a point. Even celebrities have been known to do a few hours layover at MSP airport to do some shopping because of the no sales tax on clothes. As a state we need to be careful that we don't go after the sales tax on clothes and then retail activity at MoA and other malls goes down and people get laid off. People should not just look at the sales tax that we will be getting.

I don't have the numbers to back my theory but I am thinking if someone is deciding during their layover in MSP to shop for $2,000 (not unheard of) worth of clothing it is worth their while to leave the airport and save that $200 or so in taxes that they would pay elsewhere.

This is something that needs a comprehensive study of what the gains and losses are if we expand sales tax to clothing. If the study finds out shopping tourism into MN will not be affected by all means go for it.

Numbers?

I would like to see the figures for how many MOA shoppers are there because of the lack of a sales tax on clothes. I suspect most of them are there because of the large selection, the availability of heavily advertised brand names, and because there is nothing much to do at MSP during a layover.

Of course

Of course retailers wouldn't want clothing taxed. People come from other states to get clothing tax-free. They get the benefit of drawing business, but pay none of the costs that every other business has to pay. How complicated would it be to tax only clothing over a certain price? While I agree that we should try to avoid making the basics cost more, I have no qualms taxing luxuries. And, quite frankly, with the exception of medical services, I don't know why we don't tax services.

Workable

New York and Massachusetts both exempt low-priced clothing (New York under $110, Massachusetts under $175) from the sales tax, so I don't think that would be unduly complicated. In fact, it's the best way to make sure such a tax would not be as regressive as sales taxes typically are.

Good to know

I don't understand (except for purely political purposes) why it always has to be all or none. After all, we don't tax unprepared foods but we tax prepared foods. Except that we don't tax prepared foods if they're processed and packaged and on the shelf or in the freezer. Just if someone local has actually had a hand in the processing and packaging. Seriously, why do we tax the chicken nuggets from McDonald's but not the ones in the freezer aisle that you pop in the microwave for 2 minutes?

Add on more burden

This is just not the way to go. How about some radical reform of the financial community to keep more capital in the lower tiers so that these continual increases do not continually force choices to be made between paying increased taxes and making the bills and and food needs every month-without going on the dole.

"Of the 45 states and the

"Of the 45 states and the District Columbia that have a sales tax, all but five states now impose the levy on the purchase of clothing. Many states also tax services. “We do have a very narrow [sales] tax base in Minnesota,” Frans says. “As a consequence, we have a high tax rate. It’s the highest in our region.” "

This part is key. 40 states levy sales tax on clothing, so I don't think we're breaking any new ground or "hurting competitiveness" by doing it. What does hurt us is the high sales tax rate, which is pushed to astronomical levels in downtown Minneapolis by the cocktail of local-option add-on taxes. If you have dinner or drinks downtown, have fun paying the highest sales tax rate in the entire country. THAT is hurting our competitiveness. At a minimum, we should be looking to shave 1.0% off the base rate, coupled with broadening the base.

Of course, we can't levy sales tax on clothing and services without first reaching an agreement to tax online purchases, which should be a no-brainer for MN, home of Target and Best Buy. Currently, MN residents pay no sales tax on Amazon.com, but get hit with sales tax at Bestbuy.com or Target.com purchases.

At the risk of going off-topic, we could also broaden the base by selling off-sale liquor on Sundays, increasing the rate on off-sale liquor, and legalizing and taxing marijuana.

Targeted taxation is needed

Tax all services except medical--because if the patient dies, there are no more taxes collected. Rent would not be taxed, for example (i.e. the landlord's "service" of renting out property). Services would be taxed wherever performed in the universe as long as the service was to be for use within the State of MN if the purpose of the legal service was for use within the State of MN. This would greatly expand tax revenues (high impact).

Reduce sales tax rate and do not tax food, clothing, etc--i.e. essentials. This would minimally reduce tax revenues (low impact).

Tax expansion

To be down to earth, I believe that more revenue can be gotten with a new industry, along
with advancing the whole of agraculture in Minnesota, if our elected officials would seriously
look at the advantages of allowing Hemp growth. Considering Minnesota has a large entreprurial
group of people, I believe a large and propurous industry could be created and dominated
by Minnesota.

sales tax

Sales taxes are always inherently unfair, harder on the low-income people than high-income ones. But if we followed something like New York's taxation policy, that could work. A cutoff amount below which no tax, or something like that. None on slightly used clothing, that sort of thing. Maybe no taxes on children's clothing.

tax

"the power to tax is the power to destroy"
We should be looking for ways to cut taxes not increase them!

Taxes are the price for a civilized society

That quote in one form or another goes back to 1848, when an Ohio State Senate committee issued a report on social order.

Our "very narrow" sales tax base

Still gets us more money than half the country, just wait until we expand it to just a narrow base. The Federal government just slapped a tax on medical devices with voter approval so I can't see why medical services shouldn't be taxed too. And please stop all the exemption talk, no wonder our tax system is so complicated!