The New Jersey legislature is considering a bill to impose a financial transaction tax, or FTT, on securities transactions processed for individuals and institutions in the State of New Jersey like pension funds and mutual funds. While being promoted as a means to raise revenue, this bill would tax savers, and potentially drive businesses and jobs out of the state.
An FTT is effectively a sales tax on investors and runs counter to many longstanding policies on promoting savings and economic growth, including the recently enacted New Jersey Secure Choice retirement program.
The tax will ultimately be passed along to the consumers. Accordingly, the tax will impose a significant financial burden on institutional investors, including pension and mutual funds for whom the ultimate beneficiaries are individuals, as well as pose a substantial burden on interstate commerce.
Financial transaction taxes in general reduce the return on investment savings at the expense of retirement savings. Vanguard offered this example in a June 2020 report: an individual saving for retirement who invests $10,000 per year over 40 years in a balanced portfolio of actively managed stocks (60%) and bonds (40%) with 0.01% FTT imposed on purchases of securities would cost the investor some $36,000—more than 3 ½ years of annual savings.
Securities processing is the means by which buy and sell orders are executed and by regulation, broker-dealers and exchanges must strive to achieve the most efficient execution at the best prevailing price. Faced with an FTT, these firms are likely to gravitate towards alternate trading platforms in other states to offer a better price for their clients.
Securities trading is extremely portable: technological advances and regulation require market participants to maintain high levels of resiliency to ensure orderly functioning of markets and investor protection, which means exchanges and dealers must maintain multiple back up trading venues. In today’s increasingly electronic markets, a stock trade can be conducted by the same exchange from multiple physical locations. Faced with an FTT in New Jersey, several market participants have stated they may leave the state in order to continue to best serve their customers. Not only could this result in less revenue for the state stemming from the tax, it also means the loss of good paying jobs.
A recent EY study found the financial services sector employs more than 38,000 workers in New Jersey. The economic activities of the sector in New Jersey support 25,700 employees indirectly in supplier businesses such as professional services, building services, utilities, and transportation. Additional economic contributions, which relate to the economic activity supported by the consumption spending of the sector’s employees, supports an additional 29,100 jobs which are concentrated in sectors such as restaurants, retailers, and personal services. That totals 55,000 New Jersey workers. Moreover, the sector contributes nearly $1.4 billion in New Jersey state and local taxes. An FTT would send a signal New Jersey isn’t open for business or interested in fostering as robust a financial services industry, which would discourage growth in the industry in the state, impacting not just current employment but future opportunities as well.
Moreover, the proposed FTT may impose an unconstitutional burden by imposing a tax on the sale of federal securities. In prior instances, taxes of this nature have failed when challenged legally because the activity is not sufficiently connected to a state to justify a tax; because the proposed tax is not related to benefits provided to the taxpayer; and/or because the tax discriminates against interstate commerce and is not fairly apportioned—in this case New Jersey would be imposing a tax on people outside the state simply because of where their order is routed.
As ever, history can teach us a lesson here. Major economies that have adopted such taxes have had overwhelmingly negative results, including reduced asset prices, trading moving to other venues, market dislocation and decreased liquidity. Past experience also suggests that the proposed FTT would raise less revenue than supporters often claim.
However well intentioned, this tax proposal would have negative consequences for investors and the NJ economy.
Ken Bentsen is the president and CEO of the Securities Industry and Financial Markets Association (SIFMA). He served in the U.S. House of Representatives from 1995 to 2003.