At a press conference on Thursday, Senator Tom Bakk introduced a bill that would raise new revenues for the state by applying the sales tax to clothing and sewing materials. His proposal, which he said he has not yet discussed with the tax committee or with his caucus, would use the new sales tax revenue in the following ways:
- In FY 2011, the sales tax on clothing would raise $258 million that would be used to address the state’s budget deficit.
- Starting in FY 2012, $120 million per year of the revenues raised would be used to pay back the $1.2 billion school aid payment deferral that was implemented under allotment. The remainder ($166 million in FY 2012) would be used to reduce the general sales tax rate from 6.5 percent to 6.25 percent.
- By FY 2021, the school payment shift would be fully paid back. At that point, the general sales tax rate would be reduced further. In other words, once the school payment shift is paid back, all of the proceeds raised from the sales tax on clothing would be used to reduce the sales tax rate.
There would also be rate reductions to the 0.375 percent sales tax collected under the Legacy amendment (dedicated to environment, arts and cultural heritage), the 0.25 percent metro transit improvement tax and the Hennepin County sales tax that pays for the Twins stadium. These dedicated taxes would still raise the same amount of revenue, but from a larger base and a lower rate. This is in keeping with the Legacy amendment, which states:
If the base of the sales and use tax is changed, the sales and use tax rate in this section may be proportionally adjusted by law to within one-thousandth of one percent in order to provide as close to the same amount of revenue as practicable for each fund as existed before the change to the sales and use tax.
One of the handouts from Thursday’s press conference showed that a sales tax on clothing is less regressive than the general sales tax. We have argued that tax changes are needed to make progress on addressing the rising regressivity of the tax system. Senator Bakk noted that while his preference would be to pursue a strategy of increasing the income tax, which would be more progressive, that is something that the Governor will not support so he’s taking a different direction this year.
In the press conference, Senator Bakk emphasized that he thought it was important for the state to have a conversation about the role of raising taxes as part of a balanced solution to the state’s budget problems. We agree, and appreciate his contribution to that conversation.
-Nan Madden
Does Bakk take into consideration that visitors from other states come to MN and purchase these items here because they are not taxed?
CLOTHING TAX PROPOSAL WOULD MAKE MN TAXES MORE REGRESSIVE, BUT ONLY SLIGHTLY
Senator Bakk’s presentation materials might have caused one to think his plan would reduce the regressivity of Minnesota’s tax system. It wouldn’t. It would make the overall regressivity of the sales tax component slightly less regressive. A sales tax on clothing is slightly less regressive than the regressivity of Minnesota’s current sales tax. So blending clothing into the base of the sales tax would slightly reduce the sales tax’s regressivity.
However, his plan would make Minnesota’s overall tax system slightly more regressive. Here’s why. A sales tax on clothing is considerably more regressive than the regressivity of Minnesota’s overall state and local tax system. On net, the plan would add $120 million a year of taxes that are considerably more regressive than the current overall system.
The result would make the overall system more regressive, but only slightly. The effect would be slight because the amount of revenue added is slight–in the order of increasing the overall state and local revenue by around 1/200. That amount is too small a portion of the overall revenue to move the overall system’s regressivity needle very much at all.
Senator Bakk’s presentation included a chart that had “incidence” in its title, but it was not a chart that measured the plan’s effect on regressivity. His chart showed what portion of the dollars collected would be paid by various income groups. That chart looked like those with high incomes were getting hit.
However, he did not include a chart showing the effects on regressivity. Such a chart would show the effects of the tax as a percentage of income for each income group. That chart would have showed that lower and middle income groups would pay a higher percentage of their income than would those with most income.
The reason for that is because those with modest income spend a greater portion of their income on clothing than do those with very high incomes. The state would collect more dollars from the 10% at the top than from say the 10% at modest income levels–but the 10% at modest income levels would pay out a greater percentage of their income to this tax than would the 10% at the top.
Minnesota Citizens for Tax Justice issued a press release that clarified the effects of the plan on regressivity, while praising Sen. Bakk for stepping forward with possible solutions to the crisis in school funding in the state.
Gov. Pawlenty immediately announced he would veto Sen. Bakk’s plan should it come to his desk. The chances the plan would be enacted by the legislature this year are not very high.
Real tax reform that adds revenue is going to happen. A good chunk of it as soon as next year because the state will face an even greater projected deficit in the next biennium.
What should the legislature do this year? If it can advance new revenue into law, it should. Short of that, it can help best by doing no more harm. The legislature should reject Pawlenty’s proposal to permanantly cut the renters’ credit.
Governor Pawlenty’s proposals also include various business tax cut provisions that would add $800 million to the deficit in future biennia. With minor exceptions, the legislature should reject the governor’s effort to dig the hole he is leaving the next governor even deeper.
Wayne Cox
Executive Director
Minnesota Citizens for Tax Justice