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House Lawmakers Target State Financial Transaction Taxes

Legislation

Two Republican members of the House of Representatives are pushing back on state and local efforts to impose financial transaction taxes that would impact non-residents.  

Rep. Patrick McHenry (R-NC), the ranking Republican member of the House Financial Services Committee, and Rep. Bill Huizenga (R-MI), the ranking Republican member of the Investor Protection, Entrepreneurship and Capital Markets Subcommittee, introduced the Protecting Retirement Savers and Everyday Investors Act on Oct. 27. 

In general, the legislation would prohibit states and local municipalities from imposing a Financial Transaction Tax (FTT) on certain securities industry participants, such as exchanges and broker-dealers, which would then be paid by out-of-state investors when the FTT is passed onto them—including investors saving for retirement, their first home or their children’s education.

The bill prohibits states from imposing this tax on trades by citizens who live outside of their borders by taxing the intermediaries those interstate citizens rely upon. It does not prohibit states and localities from imposing FTTs on their own citizens.

The legislation is a response to the current situation in New Jersey, where the state legislature has been considering imposing an FTT on high-quantity processors of financial transactions—including those in your 401(k)—to fix the state’s widening budget gap. 

“We know the FTT will hurt retirement savers. We know the FTT has been proven unworkable in countries around the world. And we know that New Jersey Democrats’ state-level FTT proposal will be a new tax on savers across the country,” stated McHenry in introducing the bill. “This bill will protect the everyday investors who would ultimately pay this additional tax on their hard-earned savings—including in their 401(k)s, pensions, and college-savings accounts.”

American Retirement Association CEO Brian Graff was quoted in the lawmakers’ announcement of the legislation, commenting, “A financial transaction tax is a tax on the retirement savings of hard-working Americans. This bill will prevent this Main Street tax which would otherwise be passed on to middle income earners—two-thirds of 401(k) participants make less than $100,000 a year.”

McHenry and Huizenga further emphasize that Democrats’ claims that an FTT would only impact the wealthiest investors are false. They note that an FTT is applied each time a financial transaction is conducted, including transactions of mutual funds, which 45.5% of U.S. households own, as well as transactions made by other retirement accounts, including pension plans. In addition, the FTT would be a new, additional tax on top of already-existing income taxes, capital gains taxes and corporate taxes, they further observe.

Industry Pushback

Witnesses testifying at an Oct. 19 hearing held by the New Jersey Assembly Financial Institutions and Insurance voiced strong opposition to the state’s proposed FTT. In addition, the NYSE and NASDAQ, both of which have financial data centers in New Jersey, threatened to leave the state if the proposal moves forward, contending that they have a fiduciary responsibility to do so. 

New Jersey’s proposal currently is the only state-level FTT proposed to collect taxes on trades in the United States, but the idea of taxing financial transactions persists at the state and federal level. Democratic nominee Joe Biden has called for an FTT, as did most of the leading Democratic candidates when they were still in the race. 

FTT proposals continue to surface despite several studies, including those by SIFMA, the U.S. Chamber of CommerceVanguard and Modern Markets Initiative, confirming that an FTT would be detrimental to retirement savers and harm the economy. Most recently, an October 2020 study by Modern Markets Initiative that specifically looked at the impact New Jersey’s FTT could have at various taxing levels. One example shows that the state’s FTT could cost individual investors and 401(k) plan holders up to more than $8 billion after 40 years, based on a tax level of 10 basis points for equities, bonds and derivatives. 

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