New York state faces a $9 billion budget gap in the current year and projected $17 billion gap next year, based on the most recent state financial plan. To help close those gaps, some policymakers have advocated reinstating the stock transfer tax that has been dormant for almost 40 years. While the tax is still in law, most transactions are only recorded with no money actually paid to the state.
If the tax were reinstated, New York would become the only state to impose such a tax. This poses two risks: the tax would be unlikely to raise as much as claimed because it would be fairly easy to avoid, or it may lead to a vital industry leaving the state. Advocates claim reinstating the tax could yield as much as $13 billion annually, but recent data from the State tax department show the potential revenue is about $4 billion; collections may be even less if firms deploy new technologies or relocate portions of their business outside New York. The securities industry accounts for 17 percent of state tax collections and 6 percent of New York City tax collections, but there is evidence that New York is losing its dominance in the sector; encouraging further flight of this industry would have serious, negative implications for sustaining vital public services.
New York should leave the tax dormant and rely on alternative strategies to fill the budget gaps, such as shifting capital spending from cash to debt finance, using rainy day funds, temporarily suspending tax exemptions, delaying scheduled income tax decreases, better targeting school aid, and selling unneeded assets.
Stock Transfer Tax Basics
New York’s stock transfer tax took effect in 1905, and was eliminated through a 100 percent rebate effective October 1, 1981. Today the theoretical liability is electronically administered and recorded by a third party entity for recordkeeping, but no money goes into state coffers to be later refunded.
The tax liability is calculated based on the stock’s value, with a minimum 1.25 cents tax on shares costing less than $5, and a maximum 5 cents tax on shares costing more than $20. Less valuable stocks pay more; a $1 stock is subject to a 1.25 percent tax on every sale, while a $20 stock is subject to a tax of 0.3 percent. A stock traded for $1,000 per share would incur a tax of just 0.005 percent, up to a maximum tax of $350 per day on the same stock. Once this maximum is met, the per-trade cost decreases proportionately. Currently, only the federal government imposes a fee of 0.00221 percent or $22.10 per million dollars of trades.
Unlike other types of transaction-based taxes, New York’s stock transfer tax is imposed based on where the transaction is executed, not the home or business location of the buyer or seller. The stock broker, mutual fund manager, or person effectuating the transfer is liable for the tax, but the buyer and seller also share responsibility for ensuring the tax is paid and can be held liable if it is not. The costs of the tax is likely be passed onto the buyer through higher fees.
Reimposing the tax may lead to wealth management firms, stock brokers, hedge funds, and other firms in the securities industry relocating and result in disappointing revenues.
When the stock transfer tax was first initiated in 1905, stock trades required a physical presence at a stock exchange. Because there were only a few stock exchanges, the tax did not impose a competitive disadvantage for New York. However, technology now allows trades to be initiated anywhere. Advocates’ estimates for potential revenues are based on the premise that any trade that flows through a New York based exchange (NYSE & NASDAQ) would be subject to the tax; however, the vast majority of trades are done electronically and processed through servers located in New Jersey. For purposes of determining liability, the location of digital transactions and whether they are taxable in New York has not been has not been established by law, regulation, or litigation. For example, if a non-New York State resident called her broker in New York to make a trade, and that trade is effectuated on the floor of the NYSE, it would be taxable. However, if she logs into her IRA account online and sets up a trade that is electronically completed on servers in New Jersey, that trade is most likely not taxable under current rules. For this reason, it is unlikely the tax would actually generate as much as is being asserted.
In recent weeks, the New York Stock Exchange and NASDAQ have both discussed moving their data processing centers out of New Jersey in response to reports that New Jersey may impose a stock transfer tax. Technology has made processing trades away from New York’s physical trading floors simple, and the tax may provide incentive to shift stock transfers from one exchange to another. Nations such as Sweden and Germany experienced business relocation and diminished trading levels after enacting a stock transfer tax, subsequently leading them to repeal their taxes.
Even if the tax is passed onto consumers via higher fees, a tax implemented only in New York will have an impact on location decisions since those fees will make New York based firms less competitive.
Three bills to reinstate the tax have been introduced in the Legislature. Two of these bills - introduced by state Sen. Zellnor Myrie and another introduced by Assembly Member Erik Dilan - would reduce the rebates to 60 percent and 80 percent, respectively. Because these proposals maintain the current definition of a transfer, any trades processed out-of-state would likely avoid taxation. Therefore, traders would have an incentive to shift trade processing out of New York, reducing potential revenues; but firms would not have a significant incentive to physically leave the state if transactions processed outside of New York by New York-based firms are not taxable.
Another bill, sponsored by state Sen. James Sanders Jr. and Assembly Member Phil Steck would completely repeal the rebate and expand the base of the tax to include trades where any action related to the trade occurs within the state or if a party involved in the transaction works or lives in New York. Applying the tax that widely places New York businesses and investors at a significant competitive disadvantage compared to traders located outside New York. Unlike the other proposals, expanding the definition of a taxable transaction would encourage firms to physically move their trading operations out of New York. This proposal may raise considerably more revenue than the others in the short term, but once businesses move to eliminate their tax liability, collections will decrease and jobs could disappear.
New York’s budget gaps are real, but projected revenues from reviving the stock transfer tax are not a real solution. New York’s leaders should reject proposals and instead make other hard choices to balance New York’s budget.
The Citizens Budget Commission has identified more than $8 billion in gap-closing options that would close the current year’s gap and not harm New York’s competitiveness. They include using the state’s rainy day funds, selling assets like golf courses, reducing aid to wealthy school districts, and financing critical capital investments like maintaining roads and bridges with debt instead of tax revenues. Capital projects are an appropriate use of debt because the assets created will be used by future generations. Additional gap closing measures will have to be adopted for future years, but New York’s serious fiscal crisis should not be solved with policies that would deal a blow to future economic growth.