Podcast: SIFMA Opposes the Proposed New Jersey Financial Transaction Tax

SIFMA strongly opposes the imposition of an FTT, due to the cost to retirement savers, investors, businesses and the economy.

In this podcast, SIFMA President and CEO Kenneth E. Bentsen, Jr. and SIFMA Managing Director Justin Sok focus on our 4 key areas of concern with an FTT:  negative effect on investors, revenue decline, unsuccessful outcomes with past impositions of an FTT, and constitutional limitations.

The podcast notes, from a study done by EY on the economic contributions of the NJ securities, commodity contracts and investment sector:

  • The financial services sector employs more than 38,000 workers in New Jersey.
  • The sector’s indirect and induced contributions support, in addition to those above, almost 55,000 New Jersey workers.
  • The financial services sector supports nearly $1.4 billion in annual New Jersey state and local tax revenues
  • If trade processors leave—which they have already signaled a willingness and ability to do—this proposal could result in a negative fiscal impact across the state and resultant job losses which would impact more than the finance and insurance industries.

SIFMA president and CEO Kenneth E. Bentsen, Jr. concludes the podcast with this  summary: “The proposed FTT would significantly increase the costs of executing trades in New Jersey. In the immediate short-term, these costs would be passed on to many New Jersey residents, including middle-class savers.

“Longer-term, concerns about best execution requirements would force most securities firms to execute future trades on non-New Jersey exchanges.

“If enacted, the legislation is far more likely to harm New Jersey savers and investors and the state’s overall economy than to raise significant revenue.”


Edited for clarity

Ken Bentsen:  Welcome to the SIFMA podcast. I’m Ken Bentsen, SIFMA President and the CEO. Today we’re discussing the potential imposition of a financial transaction tax on high quantity processors of financial transactions in New Jersey, which we very strong oppose. Here with me to discuss the issue is my colleague, Justin Sok, Managing Director for Tax at SIFMA. Justin, let’s get started with an overview of the issue. What exactly is a financial transaction tax?

Justin Sok:  Well, Ken, a financial transaction tax, or FTT for short, is, essentially, a sales tax on investors. Specific to New Jersey, policymakers have proposed a bill which would impose an FTT on entities that process 10,000 or more financial transactions per year through electronic infrastructure located in New Jersey.  Financial transaction taxes run counter to many longstanding policies promoting savings and economic growth. Not only does such a tax negatively impact all investors, it also negatively impacts the world’s most liquid market to further detriment of all investors.

Ken Bentsen:  It’s worth noting — and I know we’ll talk about this a little bit more as we get on — that, particularly in the equities markets and increasingly in the fixed income markets transactions are done electronically. It’s highly efficient and to the benefit of investors in driving down costs. So this clearly goes right at it. Can you talk about how if it’s a tax on trade processors the FTT harms investors?

Justin Sok:  The tax will ultimately be passed along to the consumer. Accordingly, the tax will impose a significant financial burden on institutional investors, including pension and retirement funds and other large investors, as well as it will pose a substantial burden on interstate commerce. The assets of many New Jerseyans, both from the public and private sector, who depend heavily on returns earned on their pension funds would be significantly harmed.

FTT, in general, it reduces the return on investment savings and could require many middle and low income citizens to significantly delay their retirement. If we were to extrapolate what’s going on in New Jersey out on a broader level, an individual saving for retirement who invests $10,000 per year for over 40 years in a balanced portfolio where you have actively managed stocks and bonds, a 10 basis point FTT imposed on purchases of securities would cost that investor some $36,000, or more than three-and-a-half years of annual savings, [which] is something.

Ken, since this proposed tax is focused on trading infrastructure, what would the impact be on those entities?

Ken Bentsen:  Well, as I mentioned, increasingly, particularly in the equities markets, almost all trading is done electronically, and increasingly in the fixed income markets. And the option market is, obviously, electronic, as well. And so this proposed tax would increase the cost of executing trades in New Jersey. And faced with an FTT it’s likely that many of these firms would gravitate to alternative trading platforms in other states in order to ensure that they continue to offer the best price for their clients and meet their best execution requirements.

Therefore, the imposition of an FTT would likely lead to exchanges and firms to move their infrastructure and the related jobs out of the State of New Jersey, which would, obviously, have negative fiscal and economic impacts for the State. And, in fact, many of the exchanges have suggested that they are actively considering that.

Justin Sok:  Let’s dig on this because I think this of particular importance for citizens in New Jersey. Can you expand a little bit more about the possible impact this would have on the industry, more than just New Jersey residents?

Ken Bentsen:  New Jersey has long had a large financial services presence. Obviously, in part because of its close proximity to New York as the long-time center of financial services in the U.S. and in the world. But, also, just because over the years New Jersey has been a place where firms have made great investments. And, in fact, there are more than 38,000 financial services workers in New Jersey.

The sectors indirect and [induced] contribution support, in addition to the 38,000, is about 55,000 other New Jersey workers who through service providers and others engage with the industry. The sector provides nearly $1.5 billion dollars in annual state and local tax revenues.

And if you were to make it a situation where imposing additional costs on trade processing — as I mentioned some have already signaled that they would leave if this were to happen — it would no doubt have a negative fiscal impact for the State and the local communities, for that matter, with jobs moving out of the State. And those tend to have a knock-on effect, not just on the financial services sector, but providers to that sector.

Justin Sok:  Now, FTTs are not new ideas. They’ve been around and they’ve been tested in other areas. Ken, you’ve studied this issue at length. How has the FTT worked in other jurisdictions where it’s been tried?

Ken Bentsen:  Largely, they haven’t. They’re often sold as having multiple benefits and being able to raise a lot of revenue. But, in fact, like a mini sales tax there’s an elasticity component to a financial transaction tax. And so in Europe, for instance, Sweden tried this and pulled back from it. France and Italy have imposed them, but they have never met what the desired or promoted impact was going to be. In fact, they had negative consequences.

In 1984 Sweden implemented a one percent transaction tax on equities traded and doubled in ’86. And in the 30 days leading up to the introduction of the tax the market experienced a five percent decline. And once the tax was implemented it saw a decline of 30 percent of its trading volume. And 50 percent of the volume of the top traded stocks representing 60 percent of the total trading volume shifted to London.

One study showed volatility of London traded Swedish stocks decline, while Stockholm shares increased in volatility because of lack of liquidity, and the expected revenues never materialized. And eventually Sweden chose to repeal the tax in 1991. In addition, back in 2012 France imposed a transaction tax on French equity trades from large French companies, as well as a tax on high frequency trading.

They, subsequently, raised it. But after the implementation the New York Stock Exchange, Euronext in Paris saw volume decline on average 16 percent within two months. And the French CAC 40 declined 21 percent in the first 10 days, and 16 percent in the first 40 days. And one-third of the trading volume in French public companies moved to London and other European securities markets.

The French found that they didn’t raise even 50 percent of the revenue that they had projected. And they experienced an overall 30 percent reduction in trading volume. In some the trading volume went down, market makers and liquidity providers exited, and market and revenues were below expectations. In Europe there are 27 countries that have some various regulatory barriers for companies to move their operations from one country to another.

And moving state-to-state in the United States has no such barrier, so these are things we should take into consideration when states are looking to impose an FTT. But even more broadly, nation states need to take this into consideration, as well. Because, again, such a tax has proven to be highly elastic with knock-on effects to market liquidity, which affect pricing all to the detriment of investors.

Justin Sok:  Well, one of the issues surrounding financial transaction taxes, Ken, is issues of legality. And, especially, if implemented by a state it has affects for interstate commerce. Can you speak to the legal issues here?

Ken Bentsen: The other situation is it conceivably would have a state imposing a tax on the sale of federal securities, which is unconstitutional. And I think that’s something that some have raised in New Jersey, as to whether or not this is constitutionally allowed. And it’s something that the states should think about because we have the interstate Commerce Clause, the Elasticity Clause in the Constitution, and for good reason. And so this is something that New Jersey should also take into consideration.

Justin Sok:  So, Ken, wrapping up here, what’s the bottom line view on the New Jersey FTT proposal?

Ken Bentsen:  In our view the FTT, as has been shown in other jurisdictions, wouldn’t work. It would not raise the revenue that is promised. It would increase costs in executing trades to the detriment of the end investor, which is more often than not a retail investor, either directly, or through their mutual fund, or through their pension fund, or other retirement funds because those are the majority of investors.

Second, it would likely lead to exchanges and other processors moving their operations out of New Jersey. And that can’t be good for the state having jobs exit the state and the knock-on effect of that. So in our view, while, perhaps, well-intentioned, this type of tax is one that doesn’t work and would have more negative consequences than other positive consequences.

So, Justin, thank you for talking with us today, and for our listeners on learning about the industry’s view on the New Jersey FTT proposal. And to learn more about SIFMA and our work to promote effective and resilient capital markets, please visit us at www.sifma.org.