North Dakota Sen. George Sinner is sponsoring a bill (SB 2223) before the legislature that would eliminate the sales tax on all clothing purchases. Sinner no doubt means well, but this is an awful idea. The senator is motivated by the fact that the sales tax is regressive and that exempting necessities such as clothing will provide relief to low-income citizens. It will -- but at the expense of sound tax policy.
Here is what you should know. The sales tax should fall on all final personal consumption. Everything you buy, be it tangible personal property or services, should be subject to the tax. Such a broad base minimizes economic distortions, allows for overall lower rates, and makes both administration and compliance easier. How do I know this? I have studied the great thinkers of sales taxation -- preeminent scholars like John Mikesell, Bill Fox, and Matt Murray.
Exempting and partially exempting items are terrible policy choices. In this case, exempting all clothing is an expensive approach to providing tax relief. Everyone buys clothes. So in helping the poor, Sinner will also be helping the rich. There is no reason to exempt a lawyer's purchase of a $2,000 Armani suit from tax. The poor would be better off with an overall lower tax rate.
Moreover, exemptions like this greatly complicate the tax system. The state needs to define clothing. Sinner says it does not include accessories or protective and sporting equipment. The people -- and as importantly, the vendors -- in North Dakota will be wondering whether belts, suspenders, athletic supporters, sports bras, and yoga pants are taxable. Remember, the vendor is on the hook for the tax. There will be a cost in figuring all of this out -- and if the vendor is wrong, only bad things happen.
Other states have unfortunately done this. Clothing is fully exempt in Minnesota, New Jersey, Pennsylvania, and Vermont. Massachusetts, New York, Rhode Island, and Connecticut cap the exemption. In New York, the first $110 of clothing purchases is exempt. That just causes people to buy their sweaters, jackets, pants, etc. in different transactions.
Connecticut exempts the first $50 of clothing purchases. Shoes are exempt. Boots are not. Bandannas are exempt. Headbands are not. Baby bibs are exempt. Lobster bibs are not. Chef uniforms are exempt. Aprons are not. Baseball caps are exempt. Athletic uniforms are not. Gloves are exempt, but not if they are of the athletic, garden, golf, rubber, surgical, tennis, or work variety. Earmuffs are exempt. Ski pants are not. Anyway, you get the picture.
The exemption for clothing, like that of food for home consumption, is well meaning. My cynical friends would say that the purveyors of clothing and food for home consumption seem to be behind these ideas. But they are bad policy choices. A very broad sales tax base with very low rates would serve everyone -- rich and poor alike -- much better.
This post is an excerpt of an article that appeared in State Tax Notes and State Tax Today.
