Loyola University Chicago School of Law, JD 2022
Chicago has a number of nicknames and “Derivatives Capital of the World” is one of them, as the city is home to CME Group and CBOE, two major U.S. exchange operators. The city risked this title in 2020 with the push for the LaSalle Street Tax, a financial transaction tax (“FTT”) that would impose a tax on trades made by Chicago exchanges. This tax was an attempt to fill the city’s billion dollar 2021 budget shortfall, but failed in large part because the evolution of trading has made these operators incredibly mobile. In a Chicago City Council meeting, Terry Duffy, CEO of CME Group, made it clear the imposition of the LaSalle Street Tax wouldn’t result in more revenue for the city, but a great deal of empty office space instead. For now, the LaSalle Street Tax is off the table in Chicago, but other governments, like New Jersey, are considering similar taxes. States considering FTTs ought to look at the pushback in Chicago and understand that mobility is the inevitable defense to such a tax.
What is a financial transaction tax?
The Tax Foundation, a longstanding tax policy non-profit, explains, “financial transaction taxes levy a tax on each unique instance of the buying and selling of financial assets.” FTTs can come in a number of forms by being imposed on the buyer, seller, or intermediary (like a stock exchange). They can also vary based on which financial instruments (i.e., derivatives, securities, etc.) they apply to. FFT proposals at the federal level demonstrate the varying forms an FTT can take. For example, the Wall Street Tax Act of 2019 proposed a tax of 0.1 percent on all securities applying to the fair market value of equities and bonds, and the payment flows under derivatives contracts. Alternatively, the Inclusive Prosperity Act of 2019 proposed a 0.5 percent tax on stocks, a 0.1 percent tax on bonds, and a 0.005 percent tax on derivatives.
The New Jersey data center tax
New Jersey currently serves as host to data centers for some of the largest exchanges in the United States –– like the NYSE, Nasdaq, CME Group, and CBOE. These data centers are massive facilities housing servers that process billions of trades happening in cities all over the world. In New Jersey, an FTT proposal took the form of taxing high-quantity processors (data centers) of financial transactions at $0.0025 per transaction. More specifically, the tax would be imposed on a person or entity that processes 10,000 or more financial transactions through electronic infrastructure located in New Jersey. There are reportedly billions of financial transactions processed daily, many of which occur in New Jersey data centers, and therefore the FTT could potentially result in windfall tax revenues for the state. That is if there is no backlash from those that use this infrastructure. And that’s a big, unlikely if.
New Jersey as an example of the slippery application of FTTs
The mobility that was cited by exchanges facing the LaSalle Street Tax in Chicago was demonstrated in September of 2020 when the NYSE, in coordination with Nasdaq and other industry participants, conducted a test of all its exchanges operating from secondary data center locations. This test, a reaction to the New Jersey FTT proposal, confirms the transitory nature of the industry and other states are paying attention. In response, Connecticut passed a data-center bill under emergency certification. The bill authorizes tax incentives for qualified data centers in the form of property, sales, and use tax exemptions for up to 30 years.
Connecticut is chasing the benefits that data centers have reportedly provided to other states. In a January 2020 report, the Northern Virginia Technology Council found that the data center industry in Virginia directly provided about 14,644 jobs, $1.0 billion in associated pay, and $4.5 billion and economic output. While not everyone is sold on the benefits to local governments of being a data center host, one thing is clear: where there are data centers with favorable tax environments, exchanges can and will be.
A lesson to legislators
FTTs are a tricky form of taxation that require a great deal of foresight by legislators hoping to avoid adverse reactions. Even versions of FTTs abroad have struggled to provide their promised results. After Sweden implemented a one percent transaction tax on equities and then doubled it to two percent in 1986, its market saw 30% of its total trading volume leave the country to London. Major technological revolutions since the 80s have only made the industry more mobile and the imposition of FTTs that much more difficult.
As frustrating as it may be to lawmakers and community members alike, the lesson here is that when you target exchanges or other highly mobile businesses in the financial industry, the result isn’t tax compliance, but the loss of benefits these businesses provide in the form of jobs, commerce, and existing taxes. Legislators should take this lesson seriously as they work toward future tax policies.