As states across the nation face 2021 budget gaps due to the COVID 19 pandemic, New Jersey is pursuing a financial transaction tax (FTT) on trades done at “high quantity” processors in their state. While the details of a final bill have yet to unfold, Governor Murphy and New Jersey legislators are espousing attributes we have often heard on past FTT proposals at that national level. Mainly, that its low rate and broad based design raises reliable revenue with minimal impact to behavior. As conversations take place between the parties who would experience the immediate impact, frustration on both sides is playing out in the public domain.
STA opposes FTTs because we believe they end up being paid by the end investor in the form of the FTT being directly passed on to them; higher trading costs due to wider spreads or in the lower performance on their investment vehicles which are impacted by this cost. We believe there are flaws inherent to any FTT and that the only difference between them is the backdrop or conditions under which they are presented.
If you feel the same way and reside in New Jersey, please express your opposition to your state representative. We have provided a template letter and the proper links for you to do so at the end of this article. Thank you.
Flaw #1 – “It’s a tiny, micro-cent tax.”
Throughout the history of governments and taxes, one thing is certain — the rate on a new tax is its lowest. The 16th Amendment passed by Congress in February 1909 and ratified in 1913 established Congress’s right to impose a federal income tax. The initial rate was 1% on the bottom bracket of wage earners and 7% for the top bracket. Our nation has never seen those rates again.
The George Washington Bridge opened in 1931. Today, it is the world’s busiest traffic bridge with 289,000 cars and trucks passing over it every day. Owned by the Port Authority of New York and New Jersey, a bi-state government agency, the GW’s original round-trip toll rate was $1.00, or the equivalent of $6.58 today when adjusted for inflation. Unfortunately, the round-trip toll today is $16.00, or 143% above the inflation rate and you don’t even get a bag of popcorn.
Whether New Jersey’s rate or any FTT rate is small, medium or just right, is not the question because history has proven that tiny tax rates don’t stay tiny. The question here is, should any state, or group of states, be allowed to impose a tax on our national markets for their own benefit. The answer is, no. Doing so would place too much power and influence into the hands of few and would leave our national markets vulnerable and exposed to harm.
Flaw #2 – “Since the tax is so small, behavior will not change.”
For every action there is a reaction, and consequences. To better understand the primary and secondary reactions and consequences of an FTT, Governor Murphy and New Jersey legislators need to first appreciate the fact these data centers are not a natural resource of the state that can be harvested and exploited at will. These data centers are owned by for-profit corporations that make decisions based on profitability and obligations to shareholders.
The question here is, should any state, or group of states, be allowed to impose a tax on our national markets for their own benefit. The answer is, no. Doing so would place too much power and influence into the hands of few and would leave our national markets vulnerable and exposed to harm.
As Governor Murphy points out, the FTT can be passed back to the originator of the transaction, in fact that is their intention, because doing so widens the base and raises “tens of billions” of dollars (their estimate, not mine). While an FTT can be passed to whomever originated the transaction, there are scenarios where a market maker or broker dealer will need to pay the FTT directly. There are enough of these scenarios to not only justify moving the data center, but failing to do so would breach an obligation to shareholders. This is not a Field of Dreams “build it and they will come” moment but instead a “tax it and they will leave.”One need look no further than New York’s ill-fated tax on OTC transactions from the late 1960’s. The OTC market makers fled New York for Jersey City, NJ and didn’t return, even after the tax was lifted.
Flaw #3 – “An FTT will generate consistent income.”
Hypothetically, if Governor Murphy is correct and an FTT can be structured in such a way these data centers remain in New Jersey, there would still be reactions from secondary parties, like other states.
Governors with ‘no new taxes’ platforms will argue that their residents should not have pay a tax to New Jersey. A person from New Jersey travels out of state, buys a pair of cowboy boots and pays a tax has made that choice freely. That same New Jersey resident has options and other choices. However, an out of state resident who buys 10 shares of Tesla on their mobile app, despite having multiple choices on which broker dealer they use, will have his trade executed in New Jersey and incur a tax. Where’s the fairness in that?
Governors who are more open to the idea of their constituents paying a new tax would claim the tax receipt as belonging to their state. This principle exists within state sales taxes today and would be explored by every state the moment that a press conference includes the question, “Governor, can you explain why state residents paid $1.5 billion in FTTs to New Jersey?”
It is questionable if out of state residents would have to pay another state’s FTT and even if they did, it is doubtful that the state with the FTT, in this case New Jersey, would receive the revenue.
Therefore, we urge Governor Murphy to not moved forward with the implementation of any FTT. To those New Jersey residents, who oppose an FTT in their state, we ask that you take a moment to express your opposition.