Is it time to tax clothing sales?

Minnesotans would begin paying taxes on clothing to generate money for schools, under a plan offered by a state senator and DFL candidate for governor

Senate Tax Committee Chairman Tom Bakk said his plan might run into resistance, but "sometimes leaders have to take unpopular paths."

Bakk's plan is among the first tax proposals that would bring in significant revenue offered so far during a legislative session dominated by the Republican governor's vow to balance the budget through cuts, shifts and hoped-for federal money -- but not new taxes.

"I think the state needed someone to stand up and lead," Bakk said. He sent Pawlenty a letter asking for a one-on-one meeting to discuss it. His biggest selling point is that his proposal, after the first year, would lower the overall sales tax rate.

Pawlenty told the Associated Press on Thursday he is not interested in Bakk's plan. He said clothing is a necessity that should not be taxed and that tax-free clothing sales give Minnesota retailers an advantage over merchants in neighboring states.

Tax experts have long pointed out that Minnesota's clothing exemption substantially narrows its sales tax base, making the state more dependent on other types of taxation. Minnesota is one of the few states in the country that taxes neither clothing nor most grocery food items.

The idea of expanding the sales tax to include clothing has been floated at the Capitol at least as far back as 1984. Pawlenty's 21st Century Tax Reform Commission released a report last year recommending the state expand the sales tax base, though it didn't specifically mention clothing.

Minnesota is one of only five states that don't tax clothing, Bakk said. "We're a real outlier there."

Under his plan, the state would begin taxing clothing sales July 1, producing an additional $257 million the first year. That money would be used solely to help ease the state's $994 million budget deficit for the remainder of this budget cycle. After that, the state's sales tax rate would go down to 6.25 percent from 6.5 percent but still produce an extra $120 million annually.

For the next decade, that money would be earmarked to repay the $1.2 billion in K-12 aid that Pawlenty delayed in unilateral budget cuts and payment deferrals imposed last summer.

Once schools are made whole, Bakk's plan would reduce the overall sales tax rate to 6 percent, bringing overall tax collections back to about what they are today.

Bakk, from Cook, said without this proposal, there's no guarantee -- and no firm plan -- to repay schools. The plan comes two days after a budget forecast showed the state faces a $7 billion deficit through the 2013 budget cycle.

"We need to make a commitment to schools to pay the money back," Bakk said.

School administrators were encouraged by the plan. Many districts tapped cash reserves to make up for the lost aid.

"We think this makes pretty good sense," said Charlie Kyte, executive director of the Minnesota Association of School Administrators. "There has to be some mechanism to pay it back."

Bakk said he would have preferred an income tax increase, which could pump a lot more money into state coffers. But he said the governor would never approve it. He admitted he hasn't always been a fan of boosting the sales tax.

"The sales tax on clothing doesn't poll very well; this won't be popular with people," Bakk said. "I needed to find something (the governor) would consider."

A spokesman for the Mall of America, with more than 17 million visitors from outside the state each year, said Bakk's plan threatens a signature attraction for out-of-state shoppers -- tax-free clothing.

"We believe that a sales tax on clothing purchases would be extremely detrimental to the state," said Dan Jasper, a mall spokesman. "At a time when our state economy is in crisis, why would we choose to raise taxes that will hinder tourism to Minnesota? This is one of the very few statewide policies that give the retail industry an edge."

The Minnesota Chamber of Commerce doesn't have a position on the plan.

Many Minnesota business leaders have pushed for changes to business taxes. Businesses now pay about 45 percent of all state sales taxes, mainly through purchases of business supplies, office equipment and construction materials.

"To that extent, Sen. Bakk's bill tees up that long-term conversation about business tax reform," said Tom Hesse, a chamber spokesman.

Baird Helgeson • 651-222-1288