Michelle 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.
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.
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.
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."