Thursday, February 25, 2021

Industry groups support/oppose New York’s stock transfer tax proposal

By Jay Fishman, J.D.

Various financial intermediaries have submitted written letters to New York’s state legislative tax committee expressing either support for or opposition to a stock transfer tax bill (STT) James Sanders Jr. introduced in the New York Senate, accompanied by Phil Steck’s corresponding bill in the New York Assembly. The arguments for or against the Sanders-Steck STT seem to stack up evenly but have one thing in common: all the industry groups say that now is the time to act to either retain the 1980-adopted 100 percent repeal of the STT (referred to as a rebate) or reinstate the STT because of COVID-19’s devastating economic impact on New York.

Arguments for retaining the STT rebate. The Investment Company Institution (ICI) and Securities Industry and Financial Markets Association (SIFMA) are two financial intermediaries who’s respective "legislative tax committee letters" favor keeping the rebate. The ICI principally argued that given the current U.S. business and government desire for individuals to ensure their own retirement security, the STT would contradict this belief by depleting middle class investors retirement savings, which has escalated during the pandemic. ICI proclaimed that New York’s legislative and executed branch led by Governor Cuomo should be creating incentives to encourage rather than discourage saving by, among other things, retaining the 100 percent rebate.

The ICI shared some statistics to emphasize the point:
  1. U.S. capital markets have been democratized by publicly offered investment pools that particularly provide middle class individuals with access to a diversified portfolio of stocks, bonds, or other securities that these investors could never replicate efficiently;
  2. Moreover, 39 million U.S. households that own mutual funds, IRAs, or defined contribution accounts have incomes less than $100,000, with 66 million having less than $200,000, respectively representing 50 and 85 percent of all households that own mutual funds, IRAs, or defined contribution accounts; but
  3. The STT, if enacted, would be economically borne by the wealthiest Americans but harm the middle class by depleting the above-mentioned securities these middle class investors could never replicate efficiently; and
  4. Even exempt investors such as retirement accounts and pension funds would be taxed and taxed repeatedly (just like fund investors).
The ICI lastly implored the legislators to adopt an exemption for retirement accounts and 1940 Act registered funds to the extent they are owned by retirement accounts, if the STT becomes law.

SIFMA’s two main arguments for not enacting the STT and for retaining the rebate were that the STT would damage middle class investors more so than it did in the 1970s (before being repealed) in light of the current pandemic, and that the STT would make New York anti-competitive. Extrapolating the devastating findings from a 2020 study of the effects of a hypothetical federal financial transaction taxes (FTT) on investors, SIFMA said the effects of an STT on New York investors would be similar: (1) The STT cost would specifically be passed onto both large and small investors; (2) public and private pensions and retirement funds, charitable organizations, and everyday savers and investors would pay more to save; and (3) any tax on stock transactions would reduce New York savers’ account balances, requiring them to work longer hours to meet their retirement, home ownership, college and other future investment goals.

Regarding the STT rendering New York anti-competitive, SIFMA remarked upon a report that estimates 1 in 10 New York City jobs and 1 in 15 New York State jobs are in the securities industry. Imposing a STT, therefore, could lead financial firms to move their back-office operations and related jobs outside New York, reducing employment and revenue in the state.

Arguments for restating the STT. On February 22, 2021, a coalition of groups representing labor unions, healthcare institutions, environmentalists, social service providers, faith healers and community activists sent New York State’s legislative leaders a letter imploring reinstatement of the STT. Their principal arguments were as follows:

The federal government-released stimulus money distributed throughout the pandemic has provided only a temporary stopgap for essential workers and other middle class New Yorkers who have increasingly struggled throughout 2020 to provide for their families, and others have lost their jobs and unemployment compensation, having to deplete their savings to make ends meet. Moreover, the rebate during the pandemic has so devastated New York that the state government has had to severely cut the budget, thereby threatening the most vulnerable state residents including those who have fought COVID-19 on the front lines as doctors, nurses, school teachers and others, to the detriment of their own health and financial wellbeing; and

The STT would allow New York State to raise an estimated $13-$16 billion annually, reducing reliance on the federal government and providing long-term funding for infrastructure, healthcare, education, housing, and transportation.

Members of the Tax Justice Network (TJN), including James S. Henry, TJN’s Senior Advisor and investigative economist and lawyer, in making points similar to the above-mentioned ones, sharply rebuked the arguments opposing the STT. But first Henry provided three benefits supporting the STT: (1) the STT would raise significant tax revenue, delivering a welcome transfer of wealth from rich to poor; (2) more importantly, the STT would curb excessive and harmful high frequency, speculative trading (which comprises around half of all U.S. stock market trading now) while leaving normal trading and investment intact; and (3) the STT would boost transparency, increasing tax authority financial activity oversight.

Henry then debunked the STT naysayers, including Wall Street as the largest to cry foul. Henry acknowledged that Wall Street would bear having to pay the STT but said the tax would be small, precisely five cents on every share trade valued over $20; hence, for the median Nasdaq share traded, worth $48, the STT would amount to an insignificant 0.1 percent tax. He furthermore proclaimed the STT behaves like a progressive sales tax, vastly lower than the eight percent tax New York residents pay for retail items.

Henry next put to rest SIFMA’s and other industry group assertions that have failed in other countries, particularly Europe, and that an STT would force New York-located companies to flee to non-STT imposing states. He attacked the often-bandied-about argument that Sweden regretted its 1984 FTT because it caused a trading volume decrease. Henry acknowledged that Sweden did lose some trading volumes after FTT implementation but contended this was because of design flaws; specifically, the IMF, in 2011, reported that the FTT was imposed only on trades through Swedish brokers, so "it was easily avoided by using non-Swedish brokers."

Henry then bolstered his argument favoring the STT by stating most European and other countries around the world that have imposed an FTT have had great success because of it. Britain’s economy, on par with New York financially, attained this high rank from its 1694-introduced Stamp Duty on securities, raising $3.5 billion in pounds in 2020, which translates to $4.9 billion U.S. dollars. France and Italy, too, have benefitted economically from their respective FTTs, and a new FTT push in the European Union has begun under Portugal’s leadership. Non-European countries such as China, Taiwan, Thailand, and Turkey have also enjoyed financial success from FTTs.

As for the argument that New York businesses would leave for another state should the STT be adopted, he emphasized that this is just talk that has never panned out in reality. He pointed to New York’s 1905 enacted STT which resulted in the New York Times reporting that all the money would flee to other stock exchanges like Chicago’s or Philadelphia’s, rendering New York one of those "medieval cities that fall out of the course of modern commerce." But three months later, the Times had to retract that opinion because the STT became a great success. Henry speculated that in current times, Wall Street will naturally argue that the STT would ruin middle class lives because Wall Street does not want to give up the immense gravy train it receives on fees extracted from New York pension funds—the STT would curb these extractions to Wall Street’s chagrin.

Lastly, Public Citizen claimed many of the coalition groups arguments for the STT such as raising revenue through investment in infrastructure, tamping down on speculation in the stock market, and FTT success in other countries. But Public Citizen’s Managing Director, Susan E. Harley, advanced two additional reasons for enacting the STT: it would help redistribute U.S. wealth and address racial and economic inequality that has become especially evident during the pandemic. On wealth redistribution, she said that since stocks are primarily owned by the wealthy—the top 10 percent of earners own more than 80 percent of all equities—unlike a sales tax that is regressive, financial transaction taxes are paid by those who are most able to afford it, namely the wealthy stock owners. Applying the above issue to racial inequality, Harley said that the skewed nature of stock ownership is even more pronounced when looking at racial breakdowns of wealth. In terms of overall value, she cited a statistic that Black and Latinx households own only 1 percent and 0.4 percent in corporate equity, respectively. But Harley declared "as our nation confronts generations of policies that systemically kept Black and Brown families from achieving wealth at the rates of white families, any step toward balancing these inequities must be closely examined." The STT would help close this longstanding racial gap.