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Clothing taxes and hotel subsidies: Dumb and dumber

Two items in the news point again to foolish decision making by some elected officials, especially when it comes to economics and business.

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Even if extending sales tax to clothing can be done at a lower rate and thereby make the overall sales tax rate lower, this is a regressive tax being proposed by the DFL.

Two items in the news point again to foolish decision making by some elected officials, especially when it comes to economics and business.

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David Schultz

The first is continued insistence by Sen. Tom Baak and the DFL to impose a sales tax on clothing. Recall that Gov. Mark Dayton initially suggested this idea earlier this year in his tax plan version 1.0. He proposed it along with a business-to-business tax on various services. Both the clothing tax and the B2B were so unpopular that he repudiated both. Now the Senate wants to move forward with the clothing tax even though the governor and the House DFL are opposed. This political opposition should be enough to suggest it is a bad idea, but there are other reasons to oppose the clothing tax.

High resistance to clothing tax

First, while a tax on clothing is not unheard of in other states, it is not something that has been done yet in Minnesota. Perhaps the public could get accustomed to it over time, but right now there is a lot of resistance to it among the public. 

Second, even if extending sales tax to clothing can be done at a lower rate and thereby make the overall sales tax rate lower, this is a regressive tax being proposed by the DFL. If clothing is taxed but there is no extension of the sales tax to B2B services, then this is definitely an overall less progressive tax than before. This is a tax that will weigh more heavily on the poor. It is a tax that soccer moms will notice when buying school clothing for their children.

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Third, this is a tax that might also hurt Minnesota businesses. Currently many Minnesota businesses are hurt by Internet companies which do not have to collect sales tax. With clothing not taxed the impact for sales of this type is less. However, enact a clothing sales tax and businesses with a physical presence in Minnesota will be hurt because Internet businesses will have a tax advantage. Perhaps this tax advantage will disappear if the U.S. Congress agrees to allow states to tax Internet sales. However, at present the change in tax law seems foolish and it risks hurting places like Mall of America that do a brisk job in terms of tourist and destination sales.

The second issue is a call for the City of Minneapolis to subsidize the building of a new hotel in the city. The city aspires to becoming a major convention city, and some believe that adding another 1,000 rooms will do that.

Subsidy fever

In many ways the city is becoming captured by subsidy fever. First the public pays for Target Field and now it is going to be on the hook for the new Vikings stadium. The Convention Center loses money and the Target Center would like a handout as well. With all of these demands for the public  to subsidize, it is not a surprise that a hotel wants the money too.

However, remember that hotels are private businesses. The public should generally not be in the business of giving tax dollars to private businesses. If there truly were a market for another 1,000 units it would be profitable for private investors to build it. If the public were to subsidize this hotel, what would likely happen is what has transpired in other cities – the other hotels suffer and often close. It gives unfair competition to one developer or hotel over another.

The logic of the subsidy here is a Field of Dreams “If you build it they will come” belief. It is a belief that by building another hotel more tourists will flock here. Yes, to Minnesota, a state with a cold six (or more) months of winter that wants to compete against San Antonio, Texas, and other Sunbelt cities.

Little evidence that such strategies work

There is little evidence that Field of Dreams development strategies work. As I have pointed out in my recent book, many other cities have built convention centers, aquariums, and other tourist attractions with the hope of luring people to their cities. One city doing this makes sense; multiple cities doing it dilutes the effect and increases the competition, thereby lessening the chance that such a tourism strategy will work.

This is where Minneapolis is headed too. Some seem to believe that instead of investing in neighborhoods, schools, and quality of life, sports, convention centers and hotels are the key to the city’s economic development. But any strategy relying heavily on public subsidies is questionable. 

David Schultz is a professor at Hamline University School of Business, where he teaches classes on privatization and public, private and nonprofit partnerships. He is the editor of the Journal of Public Affairs Education (JPAE). Schultz blogs at Schultz’s Take, where this article first appeared.

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