Financial Services

November Outlook: Financial Transaction Tax Grows from Local to National Threat

The recent rapid threat of an exchange tax moving in New Jersey serves as a warning for the financial services industry preparing for a Blue Wave. Without proper proactive advocacy, the industry stands to face a transaction tax on a national scale, harming consumers, investors and businesses.

With election day around the corner, planning for all likely outcomes is more important than ever. One scenario in particular – a ‘Blue Wave’ – meaning a Democratic sweep of the presidency and Congress will likely create new risks for the financial services industry that have been largely avoided under a Trump Administration.

One proposal brewing at the state level and is likely to gain more traction should there be a Blue Wave, is a financial transaction tax or FTT.  A financial transaction tax is broadly defined as ‘a tax on buying and selling a stock, bond, or other financial contract like options and derivatives.’ While the concept is not entirely new, what is new is the increased likelihood that states and the federal government, with potential bipartisan support, will seriously consider its utility as a revenue raiser or payfor to address budget shortfalls and fund legislative priorities.

In September, faced with a growing budget deficit, Governor Phil Murphy (D-NJ) said he was ‘very seriously’ considering a financial transaction tax on high-volume electronic trading in New Jersey, home to Wall Street’s massive server farms.

The proposal quickly gained traction among state Democrat legislators as a revenue raiser.  Exchanges and trading firms quickly mobilized in opposition, threatening to move their trading facilities out of New Jersey to other states, notably Illinois and Texas, if enacted.  Ultimately, these efforts were successful as FTT was excluded from the Governor’s budget proposal, but FTT remains actively on the table, now in the form of a standalone bill, moving through the New Jersey General Assembly, with a hearing set for October 19.

FTT: Local or National?

This move to rely on financial transactions to pay for government budget shortfalls isn’t new or unique. New York state is also facing declining state revenue amid the pandemic and under pressure to raise funds, eyeing both ‘wealth taxes’ and a stock transfer tax. As more states search in unconventional places to fill their budget gaps following the economic impact of COVID-19, FTT proposals are likely to become more widespread. Firms need to reshape the narrative on the impact of an FTT on consumers before it gains even more popularity among policymakers.

Iterations of a financial transaction tax have been proposed for years at the federal level and could be more likely implemented with a Blue Wave. Senator Bernie Sanders (I-VT) floated the idea of a financial transaction tax in his 2016 presidential campaign and Progressive Democrats have pushed Democratic presidential nominee Joe Biden to endorse a financial transaction tax. In a 2019 CNBC interview, Biden signaled his support for FTT stating, ‘we should have a financial transaction tax.’

Yet, Congressional Republicans have embraced the idea of tapping financial services industry funds to pay for unrelated government services. In 2015, Senate Majority Leader Mitch McConnell (R-KY) successfully pushed a proposal to divert money from banks, through an annual dividend the banks receive from the Federal Reserve, to pay for a highway trust fund. The banking industry argued that the move would set a precedent by opening the door to future use of industry funds for government needs.

Republican support for the FTT at the federal level has been mixed but does still represent a threat. Current Treasury Secretary Steven Mnuchin has taken an opposing view, stating the FTT would destroy markets. Opponents of FTT argue that it would raise the cost of investments, fail to raise the needed revenue, reduce economic growth and push businesses out of the United States. Last year, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness released a report that explored the negative impacts that reviving the FTT would have on investors, taxpayers and consumers and found that the FTT would not raise the revenue that supporters have promised. In fact, the Congressional Budget Office in 2018 projected a 0.1% FTT would actually lead to a $43.9 billion-dollar loss in revenue in its first year.

What's Next?

Understanding the full impact of the FTT on exchanges and trading firms is just the first step as its downstream effects on consumer financial products, such as mortgages, credit cards, student loans, retirement accounts and broader access to credit are far-reaching and potentially, damaging. Likely impacted firms need to better explain these far-reaching impacts now; otherwise the appeal of a transaction tax remains popular among voters and policymakers.

If New Jersey can be a guide, keeping a watchful eye on FTT discussions at both the state and federal level, proactively catching these proposals before they are considered and mobilizing the opposition will be key to stopping the momentum before it is too late.

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