Tax-free duds could be budget casualty in Minn.

(AP) - The search for the perfect eighth-grade graduation dress brought the Hulberts to the Mall of America.

Stores like Charlotte Russe and Jessica McClintock were the draw for 13-year-old Chelsea. Her parents had another reason for making the three-hour drive from their home near La Crosse, Wis.: Minnesota doesn't tax clothing or shoes.

"It's another reason to come here," Lynn Hulbert said, as his wife and daughter shopped.

At least for now.

Calls to tax clothing in Minnesota are expected to grow as state leaders confront a nearly $5 billion deficit. Extending the state's 6.5 percent sales tax to clothing would bring in about $400 million a year.

"The affluent spend more on their clothes and they buy more clothes."

Clothing, food, prescription drugs and supplies like diapers and tampons aren't taxed in Minnesota because they're considered necessities.

That case is hard to make for $1,795 one-shoulder dresses at Nordstrom, $225 flare jeans at Burberry or $138 Hawaiian silk shirts at Tommy Bahama.

Sen. Ann Rest, DFL-New Hope, favors a clothing tax with a credit for lower-income buyers. People have discretion over what they buy, she said.

"The affluent spend more on their clothes and they buy more clothes," said Rest, who pushed last year for the tax.

Even GOP Gov. Tim Pawlenty's business-friendly tax commission recommended expanding the sales tax to most consumer goods and services as a way to cut business taxes, although the group shied away from directly calling for a clothing tax - something Pawlenty opposes.

"People are hurting right now," Pawlenty said. "The last thing they need is a tax increase on their basic supplies in life like food and clothing."

Minnesota is one of five states that exempt clothing from their sales tax. No serious move is afoot to tax clothing in the other four: Pennsylvania, New Jersey, Rhode Island and Vermont.

Three other states tax clothing only above certain limits, and five other states don't have state sales taxes.

Minnesota is due for another budget forecast Tuesday that's expected to be even worse. Sen. Tom Bakk, a northern Minnesota Democrat who chairs the chamber's tax committee, said he expects a clothing tax to get plenty of talk.

Bakk - himself a possible candidate for governor - said he doesn't think the tax will fly without Pawlenty.

But Sen. Keith Langseth, a Democrat from Glyndon, said it's the kind of revenue-raiser that could come up in the usual end-of-session negotiations for a final budget.

"It's something that nobody particularly wants their fingerprints on," Langseth said.

Another complication: North Dakota is considering dropping its sales tax on clothing. That could mean extra pressure from merchants in northwest Minnesota against the tax, for fear they'd be at a disadvantage to Fargo and Grand Forks competitors.

Minnesota's untaxed clothing is a selling point for the Mall of America, whose 500-plus stores get half their sales from tourists.

"It's easier to sell it to out-of-state (shoppers) once they find out there's no tax," said Shawn Ashtiani, who sells $19.99 and $29.99 puffy slippers at the Happy Feet kiosk next to Legoland on the mall's ground floor.

The giant mall and its stores aren't the only ones capitalizing on the tax exemption.

Buzz Anderson with the Minnesota Retailers Association said regular malls, outlet malls and border stores compete better without a clothing sales tax. All four states bordering Minnesota tax clothing.

"It would hurt them all - outlet stores and all the rest," Anderson said.

Back home after the Mall of America visit, the Hulberts were contemplating a return trip. Vickie Hulbert said her daughter found a graduation dress she wants to buy if it's still there next time.

Hulbert said the family crosses the border for tax-free school clothes and to enjoy the mammoth mall, but would shop less in Minnesota if they had to pay tax on clothing.

"We would probably buy more here," Hulbert said. "We have a nice mall here."

(Copyright 2009 by The Associated Press. All Rights Reserved.)

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