New Jersey plan to tax stock trades could hamper state's financial sector

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A proposed New Jersey financial transaction tax, that backers say would net the financially struggling state billions in annual tax revenues, could wind up costing more than it takes in, analysts warn.

Gov. Phil Murphy has indicated support for a bill sponsored by Assemblyman John McKeon, D-West Orange, which seeks to impose a 0.25-cent tax per share on stocks, options, futures and swaps trading processed in New Jersey. The tax would be levied on the trades, with traders receiving the bill, which would be passed on to investors.

McKeon says the tax would net the state around $10 billion annually from entities that process at least 10,000 transactions, but the measure’s approval could also risk sparking an exodus of New York City-based stock exchanges that operate data centers across the Hudson River in northern New Jersey.

"We need to explore all options that could help our state during this fiscal crisis," said New Jersey State Assemblyman John McKeon, D-West Orange.

The New York Stock Exchange has already investigated plans to relocate its electronic trading systems out of state if the legislation gets approved in the Democratic-controlled legislature and signed by Murphy, also a Democrat. A Sept. 10 NYSE internal memo obtained by The Bond Buyer noted concerns about the tax, and outlined plans to run one of its exchanges from a backup site in Chicago for a week in late September as a test that could lead to ultimately operating outside of New Jersey.

“To fully service our exchange members and their clients, and be responsive to their concerns, we must prepare for a scenario in which the proposed New Jersey law passes,” the memo said. “The work will also include identifying new locations for data centers in states that might offer more advantageous alternatives to replace the New Jersey facility and maintain geographically diverse disaster recovery capabilities. “

Regina Egea, president of the conservative-leaning Garden State Initiative, said losing out on stock exchanges like the NYSE would have a trickle-down effect, hurting New Jersey’s financial services industry and hinder tax growth. Many firms choose to operate near the data centers operated by the exchanges, she noted.

“The adjacent jobs tend to cluster around where those transactions occur,” Egea said. “If you alienate a large player like the New York Stock Exchange why would any financial services firm want to be part of a state that has no respect for the value that company has created?”

Jared Walczak, vice president of state projects at the Tax Foundation, said New Jersey would be first state to add a tax based on electronic trades through data processing centers. New York State eliminated its previous financial transition tax in 1981 due to fears that the NYSE would exit Manhattan, he said..

While New Jersey is a convenient location for the New York-based NYSE and Nasdaq data centers, Walczak noted, the Chicago-based Cboe Global Markets also maintains some processing in the state. New Jersey’s geographic advantage, he added, might not be enough to prevent exchanges from shifting their transactions to data centers in other states.

“While this tax is supposed generate billions of dollar, it looks like it would be fairly easy for these exchanges to move their electronic processing altogether,” Walczak said. “Physical location matters less and less and some of these Wall Street-related entities that are traditionally located in New York and New Jersey may feel less of a need to be there.”

Nasdaq declined to comment on how the potential New Jersey financial transaction tax would impact plans for its Garden State data centers.

Assemblyman McKeon said NYSE’s threats to leave New Jersey would not deter his efforts to pass the bill, likening it to similar fees Texas and Oklahoma place on oil companies.

“We are ready and willing to work with stakeholders to hear their concerns, but we must come from a place of fairness,” McKeon said in a statement “We need to explore all options that could help our state during this fiscal crisis.”

New Jersey is facing a projected $5.6 billion revenue shortfall in the 2021 fiscal year budget. Murphy has proposed a $32.4 billion budget for a shortened nine-month 2021 fiscal year, starting Oct. 1, that would include $4 billion of borrowing to offset revenue losses. He also proposed raising income taxes on millionaires and making an expiring 2.5% surcharge on corporations permanent.

Murphy expressed support for the financial transaction tax during a Sept. 11 media briefing, but also noted there are too many unknowns with the measure in order to budget revenues for it in the fiscal 2021 budget. The governor said in Aug. 31 remarks that he anticipates the tax would face legal challenges if signed into law.

“We've begun a dialogue with the operators and would hope we could have a peaceful and constructive dialogue,” Murphy said last Friday. “We just can't score it in the budget because there's too much uncertainty associated with it, but I conceptually like the idea.”

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