The city’s weeklong tax exemption on clothing purchases of $110 or less has driven shoppers into stores in what economists call a state subsidized citywide closeout sale.

Retail clothing sales in New York City are subject to a 4% city sales tax, a 4.25% state sales tax and a 0.25% surcharge for public transit. All this week, New York State allows local retailers to eliminate their local sales taxes on items priced under $110, and the State will drop its own sales tax on those items as well.

Democrats in Albany who have championed the tax holiday argue that it provides especially strong tax relief to lower-income households who spend a greater share of their incomes on clothing. Some also argue that the clothing exemption makes New York retail outlets more competitive with respect to New Jersey, which already exempts clothing on its sales tax, and Connecticut, where the taxes are lower.

Economists agree that the twice a year week-long clothing tax holidays – one in the dog days of late summer and the other at the end of January – have become as much about marketing and getting people into the stores as they are about cutting tariffs.

“The effect is as much psychological as economic,” a budget analyst and economist at the Manhattan Institute, E.J. McMahon, said. “I think the retail industry likes this idea of a brief holiday as much as eliminating the tax altogether because, frankly, it is like a state-subsidized sale. The stores get an 8.5% discount subsidized by the state and city government and they add a few percentage points and it seems like a huge discount to shoppers.”

Consider, for example, the Century 21 department stores. They are eliminating tax on all items sold this week, regardless of price. The signs in their Lower Manhattan store promise price cuts of up to 70%.The tax holiday week gives Century 21 a great opportunity to clear out its stock of winter clothing and accessories.

“Tax free week does positively impact our business,” said Century 21’s executive director of stores, Jeff Jasner. “People believe they get a better deal because it is tax-free. Additionally, Century 21 will pay tax on any item not included in the event. We do anticipate a large increase in traffic for the entire week.”

Macy’s stores chose this week to hold their winter clearance sales with discounts up to 80%.

New York’s clothing tax holiday began in 1997 and briefly was made permanent in 2000 before it was resurrected after the attacks of Sept. 11, 2001. Legislators have promised to roll it back ever since, but it keeps getting put back in the budget during the final spending negotiations. This year it has become a bone of contention between Governor Pataki and Mayor Bloomberg. Mr. Pataki is in no great rush to erase it from the books and Mr. Bloomberg has said he wants to see it rolled back before the end of the year.

In theory the clothing tax was just a temporary “emergency” tax to see the city and state through the economic slowdown of 2001 and 2002. The clothing tax and a personal income tax on the wealthy were supposed to end by the close of this year. But in his budget address last month Mr. Pataki suggested moving up the expiration date on the personal income tax surcharge and leaving the clothing tax as it was. Mr. Bloomberg told legislators that he would prefer to see the clothing and shoes tax rolled back more quickly.

While it may seem like a boon week for shoppers from a more pragmatic perspective, economists said the tax is highly regressive and tax payers would be better served by an across the board tax cut than a twice-a-year holiday.