Why doesn't Minnesota charge a sales tax on clothing?

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While attending medical school in Nebraska several years ago, Sarah Mott found herself shelling out more for clothing purchases. Then she looked closer at the receipts.

"I noticed that I was paying taxes," Mott said. That was not the case back home in Minnesota.

Minnesota is one of just a handful of states that does not charge sales tax on clothing — a bit of tax policy that's so well known that it even attracts tourists. Mott wanted to know more about why the state had carved out this exemption, so she asked Curious Minnesota, the Star Tribune's community reporting project fueled by great questions from readers.

The clothing exemption dates back to the heated political battle over the creation of the state's sales tax in the 1960s. And while it was designed to help poor people, modern analysis suggests it isn't working as intended.

Many states first implemented sales taxes during the Great Depression, which was taking a toll on public budgets. But Minnesota held out largely because the Farmer-Labor governor at the time, Floyd B. Olson, objected to the tax as an unfair burden on the poor.

Thirty years later, however, Minnesotans were feeling the pinch of rising property taxes as local governments struggled to keep up with growing expenses. They needed state assistance, which spurred growing political momentum to implement a sales tax — an idea opposed by the DFL.

"Voters of Minnesota — [the] Republican Sales Tax will cost you and your family $14.00 (or more) per month," exclaimed a full-page newspaper ad from then-DFL Gov. Karl Rolvaag's re-election campaign in 1966. The ad hammered Republicans for seeking to tax "such necessities as food, clothing and medicine."

Rolvaag lost the race to Republican Harold Levander. But Levander pledged during the campaign that he would veto a sales tax unless it was approved through a public vote.

Faced with Levander's opposition, "there had to be some way to bring not only the Republican legislators but the DFL legislators around to accept it ... to get it passed in the first place and then to override Levander," said Ted Kolderie, a former executive director of the Citizens League think tank, which was influential in the debate.

DFLers objected to the sales tax as being regressive, meaning poor people would pay more tax as a share of their income than wealthier people. The state's income tax, by comparison, is very progressive.

"When it couldn't be stopped, the effort of course then was to make it as progressive as possible," said Jack Davies, a former DFL legislator representing Minneapolis. "Clothing was viewed as one of the things that was very regressive in the tax."

A Citizens League task force proposed making the sales tax more progressive by giving people a break on their income taxes. But the Legislature favored an alternative proposal to exempt clothing, groceries and prescription medicine.

The Legislature approved the 3% tax with those exemptions in 1967 — and enough votes to override Levander's veto. It represented one of several big changes to Minnesota government during that era, including the creation of the Metropolitan Council that same year.

Who benefits?

A lot has changed since the tax first went into effect. Notably, clothing is much cheaper. In 1967, clothing accounted for about 8% of household spending. Today that is less than 3%, according to the Bureau of Economic Analysis.

Not taxing clothing will cost the state about $443 million this year in lost revenue, according to the Minnesota Department of Revenue. The exemption doesn't cover some specific types of clothing, such as fur coats and sporting equipment.

Contrary to its intended purpose, however, the state's highest earners reap the most benefit from the exemption, according to research by the Department of Revenue. If clothing were taxed, the wealthiest 10% of Minnesotans would pay more than a quarter of the total tax collected. Taxing clothing would therefore make the sales tax less regressive, according to a 2013 report by Minnesota House Research.

"Wealthier people tend to buy more expensive clothes for the same identical utility," said Sen. Ann Rest, DFL-New Hope, a frequent proponent of doing away with the exemption. "I can be [just as] warm in a wool coat ... that I spend $100 on as someone who buys a fancier coat and spends a $1,000 on it."

If the exemption were repealed, Rest supports using the money to lower the overall sales tax rate — rather than raise new revenue.

But past efforts to do away with the exemption have met opposition from retailers, particularly the behemoth Mall of America. The mall has said in the past that the tax exemption is a magnet for out-of-state shoppers, based on customer surveys.

"Tax-free shopping [for clothing] gives us a competitive edge that has been instrumental to our success," Maureen Bausch, then the mall's executive vice president of business development, said in 2013.

To some, the sales tax looks ripe for reform. Economist Timothy Taylor, who is based at Macalester College, notes that our 6.875% sales tax rate is one of the highest in the nation, yet ranks in the middle of the pack vs. other states for dollars collected relative to total state income.

"When we think about the sales tax, there's lots and lots of stuff that's not covered by it," Taylor said. Clothing is a big one, but so are a variety of untaxed "services" that comprise a growing share of our spending — like auto repair and legal assistance.

The tax mantra among economists, Taylor said, is typically to "broaden the base, lower the rate."

"Don't have a high rate on a small amount of what you're trying to tax," Taylor said.

Doing away with clothing exemption is a perennial topic of debate in state politics, such as when Independence Party candidate for governor Tom Horner made it a key feature of his tax plan in 2010. But it endures.

Rest said whenever she proposes the change, she is told "this is not the time." She is done proposing it for a while, she said.

"It's very hard to get over the emotional attachment to that policy," Rest said. "It's just the way it is.

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