Tax high-speed financial trades? NJ lawmakers consider fees on data farms

Industry experts predicted the move would cost jobs while harming investors
Credit: (AP Photo/Mark Lennihan, File)
File photo: A trader follows the market on electronic screens.

A proposed tax on electronic trades processed at New Jersey-based financial data centers faced an onslaught of criticism Monday as lawmakers held their first hearing to explore raising revenue from such transactions.

Legislation that calls for the levying of a new tax that would be equal to just a fraction of a penny on each transaction is one of many proposals put forward in recent months as the state continues to deal with severe revenue losses brought on by the ongoing coronavirus pandemic.

Bill sponsors say the proposed “micro tax” on financial transactions processed in New Jersey has the potential to raise hundreds of millions of dollars because of the high volume of such trades that are handled at several so-called “data farms.”

“The amount of money that that one-one hundredth of a penny will mean to the taxpayers of New Jersey is about $500 million a year,” said Assemblyman John McKeon (D-Essex), a primary sponsor of the legislation.

Numerous representatives of the financial-services industry, business-lobbying groups and other experts testified against the measure during Monday’s remote hearing of the Assembly Financial Institutions and Insurance Committee.

Arguing against the tax

They argued any costs tied to the new levy would likely be passed along to consumers attempting to save for retirement through things like their pensions and 401(k) accounts. They also warned the proposed tax could encourage firms to leave New Jersey for places that don’t levy any fees on transactions, taking their jobs and tax revenue with them.

“There are plenty of places that would love to have stock exchange data centers,” said James Angel, a Georgetown University finance professor testifying before the committee remotely. “It will be a net revenue loser for the state of New Jersey.”

New Jersey has been hit hard by the ongoing pandemic, with 221,200 cases of COVID-19 reported statewide as of Monday, causing more than 14,400 reported deaths.

The health crisis has also triggered an economic recession and restrictions on business activity that have  taken a big bite out of the state budget in recent months. In response, Gov. Phil Murphy worked with fellow Democrats who control the Legislature late last month to head off widespread budget cuts by hiking taxes on millionaires and extending what was supposed to be a temporary surcharge on top-earning corporations.

The governor and lawmakers also approved $4.5 billion in new borrowing without voter approval to help sustain overall spending amid the revenue losses tied to the pandemic.

While revenue from the proposed tax on financial transactions is not needed to balance the budget for fiscal year 2021, the legislation remains very much alive in the State House. Moreover, Murphy, a former Goldman Sachs executive, has previously signaled his support, and the Senate version of the bill is being sponsored by Senate President Steve Sweeney (D-Gloucester).

Recent amendments that are backed by Sweeney, according to a spokesman, included a lowering of the proposed per-transaction tax rate, from $0.0025 to $0.0001.

The tax would be paid by any “person or entity that processes in this State financial securities from 10,000 or more separate financial transactions” on an annual basis, according to the amended bill. It would be implemented only during the 2021 and 2022 calendar years instead of permanently, under the amendments.

Threat that firms would leave NJ

But due to the portable nature of their processing operations, even talk of the new tax has prompted discussion among some financial firms of leaving the state.

Late last month, the New York Stock Exchange shifted the processing of some trading operations for several days from a sprawling data center in Mahwah, Bergen County, to a center in the Midwest.

An internal memo obtained by NJ Spotlight News that discussed the testing of the Midwest location also said, “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.”

Hope Jarkowski, a government affairs official who is employed by the parent company of the NYSE, testified before the committee Monday, warning members that “those with obligations to their investor clients will simply move their business out of New Jersey to avoid harm.”

“The imposition of a tax on transactions processed in New Jersey would incentivize trading volume to move immediately and precipitously to a venue located in a state where the tax does not apply,” she said.

The NYSE has nearly 100 workers in New Jersey and already pays “millions in taxes, and millions in payments to utility companies,” she said.

“NYSE will continue to make significant investments in technology and exchange operations. Our strong preference is to continue to do so in your great state,” Jarkowski said.

Republicans, Democrats have concerns

Also warning lawmakers of potential consequences was Eric Severson, executive director of the northern New Jersey chapter of the National Electrical Contractors Association. Electricians, including those affiliated with organized labor, help keep the data centers well-maintained and operating at all times, he said.

“Data centers are vital economic engines for our members, their employees and the families they support,” Severson said.

“We respectfully oppose this bill that would create additional financial burdens on contractors who are your neighbors, your constituents, and New Jersey taxpayers — so many of whom are already struggling under the weight of economic adversity,” he said.

While no votes on the bill were taken on Monday, several lawmakers from both sides of the aisle raised concerns about the proposal, even as McKeon pitched it as a means of easing the state’s budget challenges without causing widespread pain.

Assemblywoman BettyLou DeCroce (R-Morris) said she’s concerned the cost of the tax will be “passed down from the exchanges, banks and high-speed trading firms to everyone else in the market,” including New Jersey pensioners and those investing in college savings plans.

“I think we need to be responsible and to protect the state of New Jersey, which is our citizens and our businesses,” DeCroce said.

Assemblyman Roy Freiman (D-Somerset) suggested he is taking seriously the concerns that imposing the new tax could drive such trading activity out of New Jersey altogether.

“I think it actually might go elsewhere because the markets are required to find the best trading opportunity,” Freiman said.