By Alex Marshall

May 2003

It sounds too good to be true. At a time when New York City and state are billions of dollars in the red, they could raise that and possibly more by reinstating a tax that is mostly paid by people living outside the state and country.

It’s called the Stock Transfer Tax. Until 1981, the state had one, and the city got the revenue.

Until it was phased out, it was raising $300 million a year for the city. Technically, it is still in place, only the proceeds are instantly rebated to the buyer of a stock. Now some people, including an Albany legislator, are considering bringing it back in a new form.

A lot has happened since 1981. The number of purchases on the stock market has grown exponentially. If the same tax were in place now, it would raise an amazing $11 billion in 2004, according to the city’s Independent Budget Office, which recently studied the issue.

Just how does this lucrative tax work? It’s a bit hard to understand, in this age of supposedly landless and nationless capital. But, even though shares of IBM or Apple may be bought by someone in Peru or Peoria, transactions still go through the New York or American stock exchanges, which are located in New York City, if the stock is listed through those houses. The buyer pays the relatively tiny tax, not the brokerage house. The old tax was set on a sliding scale, rising up to 5 cents per share, to a maximum of $350 per transaction. No one has suggested re-instating it at the old level, in part because the various fees that are associated with stock trading have all declined.

New York State Assemblyman Ronald Tocci of Westchester County has suggested reinstating it on a sliding scale, up to a penny per share. The Fiscal Policy Institute ran a scenario study of a half penny per share, with a $35 cap. The IBO, in its studies, put it at half the old rate, or approximately 2.5 cents per share on a sliding scale.

“I see it as a possible, viable alternative to a lot of other unpopular taxes,” Tocci said in an interview from Albany.

New York State first implemented the tax in 1907. In 1965, according to Frank Mauro of the Fiscal Policy Institute, which has studied the issue, the State agreed to give all the revenues to the City in exchange for the City giving up the revenue from a penny of its sales tax. In 1975, during the City’s budget crisis, the securities industry agreed to a 25 percent surcharge. And in 1979, in part because of lobbying by the industry, Gov. Carey agreed to phase it out.

“A good tax is one where the base is very broad, and the rates are very low,” Mauro said.

“Economists agree that all taxes have economic consequences. So to have the least interference, you should have the base very broad and the rates very low.” “It’s intriguing,” said Ed Cupoli, chief economist of the Assembly Ways and Means Committee in Albany. “But the legislature would be reluctant to do anything negative to the securities industry.” In theory, the tax raises enormous sums of money at a miniscule rate of taxation, which, not incidentally, is paid by people mostly living elsewhere.

For example, if a trader in South Dakota bought 100 shares of IBM for $80 a share, the current cost would be $8,000. A penny per share stock transfer tax, depending on the sliding scale, would add at most $1 to this transaction, or 1/8000 of the total cost. For a lower-priced stock, the fee would be lower because the tax would be lower. If someone bought 1000 shares, or $80,000 worth, the fee would be capped, perhaps at $35.

Such a tax would not be burdensome on any one individual. But because millions of shares of stocks are sold daily, it would generate enormous sums of money very quickly.

If this tax can generate so much money so easily, why aren’t our competitors doing it?

They are. In fact, most other stock exchanges have a transfer tax in place, and often at considerably higher rates. Hong Kong, Singapore, France, Germany, Ireland, Switzerland and others have such a tax, all at higher rates than what is being proposed here, according to J.W. Mason, a doctoral student in economics at the University of Massachusetts at Amherst, in an article in City Limits Magazine in October 2002 (“Big Idea: Tax the Street”, www.citylimits.org.).

London, often said to be one of New York’s principal competitors, taxes stock sales at 0.5 percent of the price of a stock. This rate is many times higher than the New York tax. In the case of the 100 shares of IBM above, this would be $40, instead of $1.

If Tocci’s plan of a penny per share were put in place, it would probably raise more than $2 billion a year. If split between the city and state, this would be a significant source of new revenue for both.

There is a downside though. The worry is that if such a tax were reinstated, then the New York Stock Exchange and the American Stock Exchange, the principal entities affected, would leave town to avoid it. If the traders traded in New Jersey, their customers would pay no tax.

Tocci and others argue that the stock exchanges would be unlikely to leave town to avoid a tiny tax that they themselves don’t even pay. Some of the other remedies being considered, such as a surcharge on the income tax of wealthy taxpayers, would hit their personal pocketbooks much more directly, Tocci said.

But others in the banking and budgeting business have been more critical.

“I think it’s dead on arrival in Albany,” said Rae Rosen, a senior economist at the Federal Reserve Bank. “An industry-specific tax might on balance do more harm than good, particularly for an industry that has the ability to move operations out of the city.” The tone of the limited IBO analysis is pessimistic. The IBO examined the issue as part of a larger report, “Budget Options for New York City,” (www.ibo.nyc.ny.us/). The section on the Stock Transfer Tax says: “The proposed STT half-restoration could reduce overall private sector employment in the city by as much as 80,000 and lower receipts from other city taxes by close to $650 million.” David Belkin, Senior Economist at IBO, says that there has been a general trend against such taxes.

“The industry people say the exchange will collapse,” Belkin said. “But even just assuming some decline, that in and of itself has an impact.

London and Hong Kong have one. But there is more competitive pressure. There is a big fight going on in London over their tax. The tax is worth considering. For one thing, other more onerous taxes raise relatively small amounts of money. In the IBO’s study, “Budget Options for New York City,” (http://www.ibo.nyc.ny.us/), controversial measures, such as a Luxury Apartment Rental Tax, would raise only an estimated $27 million a year. Other taxes, such as restoring the commuter tax, would raise only about $500 million, or far less than most versions of the stock transfer tax.

One indication that the tax could work is that there already is one in place. It’s what funds the Securities and Exchange Commission. Although Congress recently scheduled the tax to decrease in rate over the next few years, it now raises more than $2 billion a year. About $350 million of that goes to fund the SEC. The rest goes into the US Treasury.

Tocci and Mauro suggest one way to make the tax palatable to The Street is to give them some direct benefit. Some of the money could pay for a new stock exchange building, or for industry promotion. It should be remembered that in the 1970s, the industry agreed to a surcharge to help solve the city’s budget problems.

“It has to be part of a community effort, it has to be part of saving New York,” Mauro said.

“Doing this at a very low rate and raising money from all over the world would be better than raising taxes that would come directly from the New York economy.”

–First published in Spotlight on the Region, the bi-weekly newsletter of Regional Plan Association in New York City.