New Jersey’s Transaction Tax Grab

New Jersey is presently facing a multi-billion dollar budget shortfall. And with tax receipts falling far short of the spending aspirations of state lawmakers, Trenton is hurtling toward incorporating a slate of new taxes in the 2021 budget, including one on financial market transactions. It’s an idea which has been around for some time, surfacing most recently in 2019 among candidates vying for the Democratic Party Presidential nomination.

In this case, the specific targets are the New Jersey-based data centers of New York City securities exchanges and other financial markets: massive server farms through which hundreds of billions of dollars worth of transactions and market data travel each day. The working proposal is that all firms executing at least 10,000 trades electronically per year – 400 per day, a threshold that ensnares even the smallest of firms – would be subject to a ¼ of one cent ($0.0025) per transaction tax. It’s a small number, but one that could add up to as much as $10 billion per year. 

History rhymes

As politicians are so fond of saying, let’s be clear: New Jersey’s budget problems are the outcome of two factors, both of which are squarely the fault of the state’s government. The first is decades of excessive spending; so much that even having some of the highest taxes in the United States are insufficient for financing it. The second are the incredibly reckless, catastrophic policies imposed in the wake of the global outbreak of the SARS-CoV-2 virus. 

Whether explained as a means of harnessing an allegedly lawless, out-of-control Wall Street, a way to reduce inequality, or simply a manifestation of the adage that “If it moves, tax it; if it keeps moving regulate it,” the likelihood that the new tax will appear soon is high. Although such a levy would ostensibly be used to address New Jersey’s fiscal gap, it’s equally likely that the tax would go toward social justice pet projects. 

It’s certainly easier to go after “Wall Street” than, say, public sector unions. The very term “Wall Street” is  

[a]bsurd … and duplici[tous.] … To summarize the vast panoply of activities conducted by many millions of individuals — employed by tens of thousands of broker-dealers, hedge funds, investment banks, mutual funds, venture capital and private equity firms, management consulting groups, and other businesses ranging in size from individual proprietorships to globally active firms — is as puerile a feat of political demagoguery as any. Only politicians, who flit opportunistically between meticulous nuance and dull monochromatics as it serves them, would find cause to use such a term.

This is the low-hanging fruit; envy-driven policies always find support.

Corollaries

Needless to say, a tax on financial market transactions will be quickly passed on to clients and customers, as will their periodic increases. And those will particularly impact the costs of administering nearly $30 trillion in retirement funds, the management of which is mostly transacted through securities exchanges in New York, and thus sure to be affected by the proposed New Jersey tax.

Another side effect of a transaction gouge is that the activity known as block trading may see a resurgence. Over the last few decades, the number of market centers – places where trades are executed, including exchanges, crossing networks, etc. – have increased. A byproduct of that process, called fragmentation, is that the average size of an execution has decreased markedly. Thus, where several decades back the average trade size was several thousand shares, it now numbers in the hundreds of shares. In an effort to keep the number of transactions (and thus the transaction tax impact) to a minimum, some firms and funds may opt to trade only in large single-transaction sized orders. That would be good for block trading firms, but would add additional transaction costs for other market participants: decreased liquidity, reduced opportunities for price discovery, and higher market impact.

Why stop there?

To the extent that the theory behind this tax is that securities trading is inherently unproductive, or that finance leads to an untenable concentration of wealth, there are many other sources of lucre to focus on: Hollywood and professional sports come immediately to mind. A tax on stock, commodity, and derivatives trades could be accompanied by a per word/per page tax on television, play, and film scripts, or perhaps a per minute tax on film lengths. 

Pro sports could be roped in as well, with a tax on event tickets or – because they’re highly paid (perhaps dangerously so!) – athletes themselves. Baseball teams or individual players could be taxed on a basis of total swings per game. Football players could be taxed for each rushing yard, quarterbacks for each pass or handoff, and so on – for all sports. 

And yes: these are facetious suggestions, but no less ridiculous than taxing financial firms on each transaction they execute.

Don’t you believe it

No one should take New Jersey governor Phil Murphy’s claim that the proposed tax on transactions tax is “not a forever thing” seriously in any way. Political economy is nothing if not a history of taxes which, promised as temporary, expanded and endured to perpetuity.

The Revenue Act of 1932 – like the proposed financial transaction tax – was designed to make up for steeply falling Federal tax receipts. It, too, contained ostensibly negligible taxes which were touted as temporary: the Federal Gasoline Excise Tax, for example. It was originally promulgated as a paltry one cent per gallon tax on gasoline that would be in effect from the passage of the bill until May 10, 1934, less than two years later. But a provision of the act allowed states to continue the tax and in many states (including, of particular note, New Jersey) it is in effect to this day: now standing at 18.4 cents per gallon to the Federal government, with a varying state tax on top of it: $0.41/gallon in New Jersey for a total tax of of $0.59/gallon, and $0.60/gallon on top of the Federal gasoline tax for a total of almost $0.80/gallon in California. 

Additionally under the 1932 Act are the Federal Firearms Tax, the Federal Sporting Goods Tax, and the Federal Tires Tax, all of which were slated to disappear in 1936, but remain in effect today. Even the Federal Telephone Excise Tax, which was reduced by small degrees in both 1990 and 2007, remains in force in some forms. 

In the wake of the so-called Great Recession, some 25 “temporary” taxes were imposed at the state level; today, three are still active; three were replaced by other, new taxes; and ten more were converted to permanent taxes. The remainder ended as planned, but could be reinstated at any time. Betting that an allegedly temporary financial transactions tax will become as permanent as the income tax – another government levy the impermanence of which was assured – is as close to a lock as exists today.

Elected racketeers and extortionists

The entire exercise is infused with the vacillation between passive-aggressive and bullying behaviors that is characteristic of legislators. While Murphy attempted to frame the threat that firms would leave the state as somehow inappropriate given the day the memo was leaked (“I’m not sure I would have put that out there at 9 o’clock in the morning on 9/11[.]”), Assemblyman John McKeon was more direct, threatening financial market firms: “They can run but they can’t hide.” (In light of his major campaign contributors, the posturing makes perfect sense.)

On Saturday, September 26th, the targeted financial markets and firms will conduct tests to ensure their business continuity in the event that the proposed tax is approved: they will relocate, quite possibly overnight, to another state. Governor Murphy, meanwhile, has expressed his hope that those businesses will be “prepared to give a little bit of blood [and] help us all get through” the consequences of policy choices made in Trenton “for the next couple of years.” 

There’s no reason for optimism. The “little bit of blood” that was taken from consumers in the form of the Federal Gasoline Excise Tax in 1932 – and supposed to expire two years later – has, over an uninterrupted course of nearly ninety years, expanded and extracted over $1 trillion from consumers’ pockets. 

The views of political figures regarding the nature of financial markets – whether they are essentially a purposeless casino to be bilked when and as needed, or an engine of economic calculation for pricing aggregates of capital goods – are a solid litmus test for the degree and depth of their overall understanding of economics. It is unsurprising that public officials in the state of New Jersey – a state with horrible finances owing to spendthrift decades and now draconian COVID policies – fail here as well.

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