Budget-Minded Moms Foot the Bill for Absurdly High Shoe Tax

Michelle Valencia, and her daughter Audrey, shop at PaylessMichelle Valencia and her daughter Audrey, 8, were checking out the dressy shoes last week at the Payless (PSS) store in Manhattan, a block away from Macy's (M) fabled flagship store on 34th Street.

Audrey was on the hunt for some jazzy new kicks for a talent show, and she was considering a pair of black patent-leather flats.

Valencia, a single mom who also has a 5-month-old son, Avery, finds herself buying footwear for her daughter pretty regularly.

"Her feet grow so fast," says the special education teacher from Manhattan. Also, "she seems to destroy her shoes pretty easily." But like school uniforms, gym clothes, and Audrey's everyday wardrobe, footwear is just one more item to be factored into the Valencia family's tight budget. Which is one good reason to shop at a lower-priced chain like Payless.

But there's a big hidden cost to that choice: People like Valencia, a self-described member of the "working class," are paying a far higher tax rate on their footwear than more affluent shoppers.

Inexpensive canvas and rubber-soled shoes of the types commonly sold at stores like Payless and Walmart (WMT) are taxed at a rate that's at least six times higher than more expensive leather footwear, a tariff that hits the very shoppers who are least likely to be able to afford it.

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Today, the tax rate on canvas and rubber-soled shoes ranges from 48% to 67.5%, while the rate on high-end leather footwear and designer shoes is a mere 8%.

These regressive import duties disproportionately jack up the price of kid's shoes, a high frequency, needs-based purchase: Growing children like Audrey require new shoes -- and often.

But there's some potential good news on the horizon: America's biggest footwear retailers and manufacturers are fighting to eliminate that Depression-era "shoe tax" that to this day has low-and-moderate income families footing the bill.

Holdover From The Depression

The footwear tariffs debuted in the Smoot-Hawley Tariff Act of 1930, and were originally intended to protect the then robust U.S. shoe manufacturing base. But, today, 99% of shoes sold in the U.S. are made overseas, making the tax entirely obsolete. And, as the chart below shows, it's more than 100 times the 0.6% tax on a luxury like jewelry, for example.

Tariff rates

Passage of the Affordable Footwear Act will bring about permanent tax relief to lower- and middle-income American families, its proponents say. And unlike certain other contentious tax issues, there's bipartisan support for eliminating the shoe tax, says Matt Priest, president of the Footwear Distributors and Retailers of America, who leads the AFA coalition.

"It's quite possible some shoes could see upwards of a 25% savings if the AFA is passed," he tells DailyFinance.

"For us, it's a fairness issue," Priest says. The tax is "directed toward moms and kids whose feet are growing dramatically."

But the shoe industry isn't backing the AFA solely out of an altruistic impulse: It expects to benefit too.

"This is an opportunity to make our shoes more affordable and accessible for the American family, and we [also] hope to sell more shoes," Michael Massey, CEO of Collective Brands, Payless' parent company, tells DailyFinance.

The AFA is currently being considered by Congress. But the end of the shoe tax, should the bill be passed, isn't likely to occur until after the elections, in 2013, at the earliest, Priest says.

If the footwear tax is eliminated, these $17.99 girl's flats from Payless would drop to about $15.99.

That's none too soon for the footwear industry. Shoe prices have been inching up due to rising production costs, tightening margins for retailers and suppliers, and pinching cash-strapped shoppers, experts say.

A 'Disgusting' Tax

As recently as the 1980s, shoe manufacturing still had a solid footing on U.S. soil. Back then, about 50% of footwear was made domestically, says Greg Tunney, CEO of RG Barry, parent company of Dearfoams, the nation's largest slipper supplier.

From Maine to Boston, the upper Northeast "was a huge area for footwear," home to shoe companies such as G.H. Bass. And in the Midwest, St. Louis was "at one time known as first in booze, baseball and shoes": Manufacturers like Brown Shoe Company, with brands such as Naturalizer, operated factories there, Tunney says.

But today, the protectionist tax is a total anachronism, as most American shoes are made overseas, largely in China, but also countries such as Taiwan, Korea and Brazil. "We're protecting an industry that doesn't exist anymore in the U.S.," he tells DailyFinance.

Yet the tax remains, and the duties are so hefty, there's no option but to pass them along to consumers, industry executives say.

"On a given year," Tunney says, "[Dearfoams] can make $15 million net profit. At the end of the day, we're paying over half of our profits on the duty fee."

"But what tugs at the heart is how it affects low-income consumers, who need the help the most," he says. "So if you're a single mother on a limited income, [you're paying a higher duty rate] on a pair of $20 shoes than someone who's paying $600 for a pair of Christian Louboutins. That's when it gets disgusting."

While nobody really needs a pair of $600 shoes, basic footwear "is not a luxury. If you have kids and you're on a limited income, you still have to have shoes," Tunney says.

Forgoing New Shoes to Make Ends Meet

Although the recession officially ended in 2009, it hasn't for Payless' core shoppers: moms with limited incomes and multiple children, Massey says. With more than 4,500 stores, the discount chain is the largest seller of children's footwear in the U.S.

Even though elementary school kids with ever-growing feet need to replace shoes about four times a year -- and sometimes more often, depending on the child's age -- Massey has observed that parents have been delaying those purchases in the down economy.

"I work in the store a fair amount," he says. "Moms right now in the U.S. are having a tougher time meeting [their budgets]: We see in our stores that people are waiting longer to buy their kids shoes because they have to stretch their budgets."

"Even if she's buying an incredible value shoe for $9.99, if she's buying three pairs of shoes [for three kids, for example], that's $30," which is no small purchase for a family tight on money, he says.

These moms are "disproportionately affected by the economic slowdown. Things haven't picked up in many places in the U.S."

If the footwear tax is eliminated, Payless' $17.99, Avery Jersey Bow girl's flats, for example, would drop to about $15.99, Massey says.

That $2 savings would make a difference to Valencia, she says: In her budget, that equals a subway fare, and every little bit counts. "The way the economy is, you have to stretch every dollar."

How Uncle Sam Spends Your Taxes
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Budget-Minded Moms Foot the Bill for Absurdly High Shoe Tax

Many folks think that Social Security shouldn't be counted in the federal budget at all, because they contribute to the retirement fund with each paycheck.

Actually, though, taxes paid in by today's workers aren't socked away for their future retirement, but are used for benefits for today's retirees -- an estimated $779 billion worth of them in fiscal year 2012.

What's more, the so-called trust fund -- where payroll taxes not needed for current payouts are stashed -- consists of $2.7 trillion in IOUs from the U.S. Treasury. The funds have been borrowed over the past two decades to pay for other federal programs.

Nearly 18% of President Obama's proposed FY 2013 budget is for defense spending. It includes funds for military operations in Afghanistan, Iraq and South Korea as well as for 760 bases scattered across the U.S. and abroad.

The $716-billion tab also pays for research, construction, family housing and myriad defense-related items. About 25% of the total goes to personnel costs, and the figure doesn't include veterans' pensions and health care.

Combined, these two national health care programs rival defense and Social Security as Uncle Sam's biggest expenses. While the White House and Congress talk a lot about cutting these health care costs, lawmakers have avoided taking the tough -- and extremely unpopular -- actions needed.

In addition to Medicaid, about 9% of the total federal budget is dedicated to assistance for the needy. The total -- about $297 billion for FY 2012 -- includes funds for housing subsidies, food stamps, school lunch and other nutrition programs, aid to families with dependent children (welfare) and other aid, plus the earned income tax credit.

In addition, unemployment insurance will account for a bit less than $82 billion -- and about 2.1% of the budget -- in FY 2012. With the economy improving, that's well down from the $160 billion doled out in 2010. A $58-billion tab is expected in FY 2013.

Next fiscal year, Uncle Sam is expected to shell out a whopping $224 billion in interest to the owners of U.S. Treasuries, here and abroad. For the past few years, low interest rates have helped keep a lid on this category. But interest rates won't remain at historical lows forever. Meanwhile, the debt accumulates.

The White House estimates that debt held by the public will approach $12 trillion at the end of FY 2012. If you include intragovernment payments -- by the Treasury to funds such as Social Security, for example -- the nation's total gross debt will approach $16.5 trillion. In coming years, interest payments will gobble up even more.

The biggest five items in the federal budget -- Social Security, defense, Medicare, Medicaid, and net interest on the debt -- account for about two-thirds of the total.

Everything from transportation (3.3%), education (1.9%), federal employees' and military retirement (3.8%) to science and space (0.9%) and homeland security (1.3%) comes out of what's left.

International aid -- frequently mentioned as a potential source of savings -- accounts for just 1.7% of spending, and half of that is for humanitarian assistance. All environmental and natural resource programs -- 0.6%. Help for low-incomers, which we have already discussed, is an amalgam of programs whose total adds up to 9% of federal spending.

Only about a third of the federal budget actually falls under congressional control on an annual basis, and much of that is for defense spending -- mostly off-limits for political reasons.

About three-fifths of the budget is dedicated to programs such as Social Security, Medicare, Medicaid, food stamps, crop subsidies and other programs for which spending is automatic -- controlled by formulas. Add interest payments to the list of uncontrollables and untouchables, and the share of spending Washington can actually manipulate from year to year is about 16%.

If that entire 16% -- encompassing programs as diverse and as popular as medical and scientific research, space exploration, maintenance of national parks, repairing roads and bridges -- were eliminated, it would reduce the federal deficit only by less than half. Individually, these programs amount to crumbs on Washington's dinner table, where $38 billion is just 1% of the main course.

About 58% of all government spending consists of direct payments from Uncle Sam to individuals. Retirees get Social Security payments, veterans' pensions and Medicare benefits. Students get tuition assistance. Payments are made to farmers to idle erosion-prone land. Victims of natural disasters get a helping hand to rebuild their homes, businesses and lives.

Lobbies for many of these programs are immensely powerful and usually able to deflect attempts to trim spending. And while nearly everyone agrees that belt-tightening is needed, few are willing to cinch in their own waistlines.

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