North Dakota House members on Tuesday proved willing to abolish the state's sales tax on clothing and limit the sales tax rates local governments may charge.
But they rejected a chance to cut the state's 5 percent sales tax rate to 4.5 percent for two years, despite a plea from Rep. Dwight Wrangham, R-Bismarck, that doing so would be the best tax move legislators could make this year.
The state sales tax "falls hardest on the people with the least ability to pay," Wrangham said. "We think of it as a penny at a time. Well, that's where money comes from. It comes a penny at a time."
Backers of the clothing tax break said exempting clothing from North Dakota's sales tax would put Red River Valley merchants on an equal footing with store owners in Minnesota, who advertise the state's lack of a sales tax on clothes. Minnesota's sales tax is 6.5 percent.
"This does give relief to people of moderate income and lower income, when they buy clothes," said Rep. Louis Pinkerton, D-Minot.
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Critics of the exemption said it would deprive cities and counties of local sales tax revenue. When the Legislature exempts something from the state sales tax, local governments are required to follow suit.
Rep. George Keiser, R-Bismarck, said the clothing exemption probably would cost Bismarck more than $2 million in lost collections. That income would have to be made up with higher property taxes, Keiser said.
Rep. Kathy Hawken, R-Fargo, had similar reservations. She said she had heard no groundswell of support from Fargo merchants to drop the state sales tax on clothing.
"This is not where we need to do the return to our citizens," Hawken said. "This will only increase the property taxes. … I don't think it's what they want."
North Dakota's Tax Department estimates the clothing exemption will result in about $38 million less in state sales tax collections for two years. Of that sum, $3 million would be distributed among local governments.
Representatives also approved putting a 1.5 percent cap on the sales tax rates cities may charge, and a 1 percent cap on county sales taxes. The legislation says cities and counties may go above the caps if they get approval from at least 60 percent of their voters.
Of the 123 North Dakota cities that have a local sales tax, 31 have rates greater than 1.5 percent, the state Tax Department says. Twenty-nine cities, including Minot, Devils Lake, Jamestown, Valley City and Williston, charge 2 percent.
The clothing tax exemption and the local sales tax limits now go to the North Dakota Senate for review.
Representatives approved the clothing exemption 66-26, and voted 51-40 to endorse limits on local sales taxes. The proposed two-year reduction in the state sales tax rate lost, 47-44.
The clothing tax exemption bill is HB1268. The bill limiting local sales tax rates is HB1517. The measure that lowered North Dakota's sales tax from 5 percent to 4.5 percent for two years is HB1521.