It is easier to switch data processors than to remove an entire stock exchange to a new region.īut even that larger move is not impossible. In an industry where latency matters, options for relocating New York Stock Exchange (NYSE) data processing are not unlimited-but at the same time, they are not wholly constrained to New Jersey, either. For many securities, it would be relatively easy to move trades to the Chicago Stock Exchange and thus avoid the tax altogether, which would further pressure New York’s financial industry to relocate its processing centers. These exchanges would either move their data centers or absorb the tax and pass it on to traders. This would capture many of the major exchanges in New York City, as they use New Jersey-based data centers. New Jersey’s tax base is defined as transactions that take place using “electronic infrastructure” located in the state. Implementation of this tax raises an additional issue: it is much easier to avoid a state FTT than a national FTT. However, it is difficult to predict the magnitude of the trade reduction, which has caused many existing FTTs to miss their revenue targets. There is currently no fiscal note indicating how much revenue this tax would raise if implemented. Restricting high frequency trading, moreover, can reduce liquidity, locking in investors as share prices are falling.Īny trading decrease would then reduce the revenue raised by the tax.
While the primary tax burden would fall on the wealthy-as is probably intended-all investors would see lower portfolio values because of the decrease in asset prices. These kinds of trades see very small profit margins, and thus are more affected by taxes. It would especially reduce high-frequency trading. New York’s tax on the transaction itself would run almost 50 times higher than the federal tax.Ī state FTT would raise both explicit and implicit transaction costs, bringing down the volume of trades and lowering the price of assets by dipping into investor profits. Trades of shares of Sirius would be taxed at 0.8 percent.Īt a price point of, say, $40 a share (some large companies trade for orders of magnitude higher), New Jersey’s tax on Wall Street transactions-for which the state’s only connection is housing the data processing facilities-would be three times the so-called Section 31 fee designed to support all SEC regulatory activity. The same ratios would hold in New York, where proposals are more nascent but also much more aggressive. The effective rate on the sale of a Berkshire Hathaway Class A share ($288,257 at market close on July 22) would be 0.0000009 percent, while the rate on the sale of a share in Sirius FM ($5.94 at close) would be over 48,500 times higher at 0.04 percent. Because the tax is imposed per transaction, the effective rate would be much higher on stocks that trade at lower prices-largely, though not invariably, associated with small and midcap stocks. This distorts investment decisions in that it slightly favors contracts with higher values. The bill proposes a flat-rate transaction tax, while most countries with FTTs levy a percentage-based tax. This rate may seem small, but it would quickly pyramid as the same instrument is traded-and therefore taxed-multiple times. The tax would be imposed per instrument, not per trade, meaning that a purchase of 1,000 shares would generate $2.50 in taxes. The quarter-cent tax would be imposed on each transaction that is processed in New Jersey, with a transaction defined as any purchase or sale of a security-including a share of stock, a futures contract, a derivative, or any similarly traded financial instrument or contract. There is no federal-level FTT in the U.S., though fees are imposed to fund the regulatory activities of the Securities and Exchange Commission (SEC). If either state succeeded, it would represent the only financial transaction tax (FTT) in the United States, although New York had its own FTT from 1905 to 1981. In New York, some lawmakers have proposed a rate as high as 5 cents per share (1.25 cents for stocks worth less than $5). New Jersey’s A4402 would impose a 0.25 cent tax on every financial transaction processed in the state. Seeking new sources of funding, New York and New Jersey-two states at the heart of global financial markets-are considering financial transaction taxes.
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