A New Jersey Democrat has introduced a bill that would levy a financial transactions tax on high-quantity processors, a proposal that could generate substantial revenue for the cash-strapped state but will likely face significant headwinds from the financial industry.
A. 4402, introduced July 16 by John McKeon (D), chair of the Assembly Financial Institutions and Insurance Committee, 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 New Jersey during the calendar year.
Under the bill, the tax would apply to transactions involving financial securities such as futures contracts, options contracts, futures option contracts, swap contracts, credit default swap contracts, derivatives, or stock shares.
The bill’s statement notes that “there are reportedly billions of financial transactions processed daily, and many of those are processed through electronic infrastructure located in New Jersey. This tax, which is on the processor but may be passed along to the purchaser or seller, can therefore potentially raise a significant amount of revenue for New Jersey.”
If enacted, the legislation would become effective within 90 days.
The bill's introduction follows a June 14 op-ed in The Star-Ledger calling for a “micro-cent” tax on financial transactions to help solve the economic crisis facing the state. The op-ed was written by David Applefield, who died suddenly on July 8 after running unsuccessfully for Congress, and Andrew Ellis.
“New Jersey should impose a pittance of a ‘Financial Transaction Fee’ on all stock trades that occur on computer servers physically located in the State of New Jersey. At this moment of crisis, there is both financial and moral justification for the public treasury to garner a ‘micro-cent’ from each traded share, starting with as little as half-a-cent per share of transaction processing,” they wrote.
A financial transaction tax was embraced by Democratic presidential candidates this year, including Michael Bloomberg and Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt.
Wall Street financial transactions are processed at three data processing centers in New Jersey, according to the op-ed. Concerns have been raised that imposing the tax could cause those centers to lose business or prompt them to move elsewhere.
Richard Pomp, a professor at the University of Connecticut School of Law, told Tax Notes that he thinks the tax would be "near impossible to audit."
Sheila Reynertson, senior policy analyst at New Jersey Policy Perspective, which has advocated for increasing taxes on the wealthy to help fund public services, told Tax Notes that the proposal is promising, but more research needs to be done on the legal issues it may face. “We see this as a placeholder and a concept bill, but to be taken seriously it’s going to have to go through the wringer to see if it would hold muster in court,” she said.
Janelle Cammenga, policy analyst at the Tax Foundation, said in an email that financial transactions taxes like this one “rely on a poor tax base: they tax the same economic activity many times, leading to tax pyramiding.”
Cammenga said the proposal “would also distort asset markets — types of securities traded more often would be taxed more than assets traded less often — and decrease liquidity.”
“As it now stands, the bill is void for vagueness” because it fails to define certain key terms, such as “electronic infrastructure located in New Jersey,” Pomp said.
Reynertson said she expects to see some new revenue-raising proposals like this one that target those who haven’t been negatively affected by the pandemic.
New Jersey’s state treasurer said in May that the state could face a combined $10 billion revenue shortfall between fiscal 2020 and 2021.