New Jersey lawmakers have taken an interest in implementing a state-level financial transactions tax, which would levy a small fee on the billions of stock trades that are processed in the state every day. This could be a promising way to raise additional revenue from high-income earners and tamp down excessive stock market speculation. It could also be the answer to the state’s long standing fiscal woes, including billion-dollar debt service payments that crowd out other spending. But it is unlikely to become a reality in time to shore up New Jersey’s revenue shortfalls during the immediate fiscal crisis.
Based on a compelling proposal published in a June op-ed, a recently introduced bill (A4402) would apply a micro-tax on high-speed stock trading. Specifically, this bill would impose a $0.0025-per-transaction tax on persons or entities that process 10,000 or more financial transactions through electronic infrastructure located in the state. The tax, estimated to generate $13 billion in annual revenue, would apply to transactions involving financial securities such as futures contracts, derivatives, and stock shares. The largely conceptual bill was introduced by Assemblyman McKeon, chair of the Financial Institutions and Insurance Committee, and has grabbed the attention of both the Governor and the Senate President. New York has introduced similar legislation[1] and Vice-President Biden also has his eyes on a financial transaction tax at the federal level, as originally proposed by Senator Elizabeth Warren.
But how do these financial transactions work? Every day, trillions of dollars’ worth of financial securities are traded electronically at hyper speed through fiber-optic cables connected to banks of computer servers. Those servers don’t reside under Wall Street in Manhattan; they sit in metal cages inside nondescript, temperature-controlled facilities just across the river in New Jersey. The largest among them — a 338,000-square foot data center in Secaucus — provides storage space for servers owned or leased by thousands of companies including Nasdaq, the New York Stock Exchange (NYSE), Bloomberg LP, and the Chicago Board Options Exchange, plus telecommunication companies and brokerage firms. Densely packed data centers like this one make it possible to trade stocks on a smartphone, as all the intermediaries needed to complete such a complex transaction are housed in this data center. This particular mega data-center is so vital to the U.S. financial industry that it requires five security checkpoints to reach the servers themselves and contains multiple backup options in the event of a power outage.
While the revenue potential is impressive, further study of the state-level proposal is necessary. For instance: How would this tax be structured? Would it mimic the current fee on stocks and derivatives collected by the Securities and Exchange Commission (SEC) to fund the agency? Which entities would pay the tax: the data centers that provide the infrastructure for the servers, the exchanges or other financial firms that own or lease the servers, or the software companies that facilitate high-speed trading taking place on these servers? Besides potential legal issues that arise in taxing any interstate transaction, technical issues of how to appropriately tax the transactions also need to be thoroughly vetted. And designating taxable transactions of such vast swaths of financial activity could run into regulatory issues.
The NYSE has shown its cards by threatening to pull its data centers out of New Jersey should the state pass the legislation as proposed. But speed is profit in this business and such a move from New Jersey to Chicago would decrease the transfer of data from .33 milliseconds to 9.5 milliseconds, according to the International Exchange, owner of the NYSE. And who is to say Illinois won’t pass their own version of a transaction fee? That state has introduced several financial transaction tax bills since 2015.
It may be worth exploring other ways to tax these data centers that do not involve the high-speed transactions themselves. Given the novelty of the proposal — no other state has implemented this tax since New York repealed theirs in 1981 — and the high probability of legal action against it, a tax on financial transactions is unlikely to generate revenue in FY 2021.
Of course, given the tremendous revenue potential and the likelihood that this tax would be paid by high-income people who own financial assets, NJPP supports efforts to craft comprehensive legislation to establish a financial transactions tax. We also recommend that state lawmakers allocate most, if not all, of the revenue toward paying off New Jersey’s outsized obligations. By dedicating funds to pension payments and debt service, large amounts of revenue would be freed up for investments in areas that benefit all New Jersey families, such as public education, health care, college, housing, and child care support, to name a few.
End Note
[1] New York A7791, introduced by Rep. Phil Steck (D), would repeal the state’s rebate of the stock transfer tax and use the revenue to maintain roads and bridges and fund various state programs. The tax, which was levied from 1905 to 1981 on the sale of securities, is 100 percent rebated to the industry under current law.
