ICI Submits Opposition Letter to NJ FTT Proposal (pdf)

By Electronic Delivery August 28, 2020 Assemblyman John F. McKeon 221 Main Street Madison, NJ 07940 RE: OPPOSITION to Financial Transfer Tax Dear Assemblyman McKeon: The Investment Company Institute1—on behalf of shareholders in all funds, including mutual funds, that are registered under the Investment Company Act of 1940 (the “1940 Act”)—strongly opposes A4402. A tax on processors of financial transactions of a quarter of a cent ($.0025) per transaction would increase the cost of saving for retirement and other long-term needs for New Jersey residents and other individuals. Background 1940 Act-registered funds are publicly offered investment pools that provide individuals with access to a diversified portfolio of stocks, bonds, or other securities that these investors cannot replicate efficiently. These funds, consequently, are very attractive investment vehicles for moderate-income investors.2 Our capital markets have been democratized by funds in ways that could not have been imagined just a generation or two ago. In fact, at year-end 2019, funds held approximately 32 percent of US-issued equities.3 1 The Investment Company Institute (ICI) is the leading association representing regulated funds globally, including mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts (UITs) in the United States, and similar funds offered to investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. ICI’s members manage total assets of US$25.2 trillion in the United States, serving more than 100 million US shareholders, and US$6.5 trillion in assets in other jurisdictions. ICI carries out its international work through ICI Global, with offices in London, Hong Kong, and Washington, DC. 2 Retail investors (i.e., individuals) hold the vast majority (89 percent) of US mutual fund assets.https://www.ici.org/pdf/2020_factbook.pdf , Figure 3.3. 3 https://www.ici.org/pdf/2020_factbook.pdf, Figure 2.7. ICI Letter Opposing A4402 August 28, 2020 Page 2 of 3 The typical fund investor is a middle-class American with a median household income of $100,000 and modest holdings.4 Almost half of all American households5 invest in mutual funds; they depend on their fund investments to buy a home, finance a child’s education, support aging parents or extended family, and prepare for retirement.6 Application of the Proposed New Jersey FTT to Fund Investors The proposed financial transaction tax (FTT) would significantly increase the cost of transactions processed electronically in New Jersey that involve a fund’s portfolio securities. To the extent that the purchase and sale or redemption of fund shares also are processed electronically in New Jersey, those transactions also would be taxed. This tax would apply irrespective of whether the fund or its investors are located in New Jersey. By applying the tax only to persons or entities that process 10,000 or more financial transaction annually through electronic processors located in New Jersey, the tax may be characterized as hitting only big players. The tax, however, would be passed on to the purchasers or sellers of securities or other financial instruments regardless of how many or few transactions they make. So, a transaction involving an individual purchasing fund shares once a year would be taxed if the processor of the transaction meets the 10,000-transaction requirement. Because fund investors are the sole owners of a fund, the investors’ return is reduced on a dollar-for-dollar basis by all costs incurred by the fund. These costs would include an FTT on portfolio and shareholder-level transactions processed through New Jersey. An FTT, consequently, would increase a fund’s costs and reduce the return to the middle-class shareholders who own the fund’s shares. The Proposed Tax Would Harm Middle Class Fund Investors The bill’s sponsor advocates that the FTT will raise significant amounts of revenue for New Jersey because billions of financial transactions are processed daily, many of them through electronic infrastructure in New Jersey. A substantial portion of this tax, however, would fall on the moderate-income investors in funds and would decrease their return on investment. Investors saving for retirement have benefitted tremendously from falling expense ratios; this tax would significantly negate the benefit that reduced costs have had on investment returns. Given the increased 4 The most recent ICI data show median mutual fund assets of $150,000 per household in four accounts. https://www.ici.org/pdf/2020_factbook.pdf, Figure 7.2. 5 The most recent ICI data show 45 percent of US households owned mutual funds in 2019. https://www.ici.org/pdf/2020_factbook.pdf, Figure 7.1. 6 The most recent ICI data show that individuals invest in mutual funds to save for retirement (92 percent), for emergencies (50 percent), and for education (24 percent). https://www.ici.org/pdf/2020_factbook.pdf, Figure 7.2. ICI Letter Opposing A4402 August 28, 2020 Page 3 of 3 responsibility that individuals have for ensuring their own retirement security, the legislature should be creating incentives to encourage rather than discourage saving. FTTs are Poor Revenue Raisers and Harm Markets Many states are facing extreme revenue declines as a result of the COVID-19 pandemic and are exploring new taxes to shore up the shortfalls. There is no evidence, however, of the purported benefits of FTT-type taxes.7 Most studies have found that these taxes raise far less revenue than predicated and result in tremendous efforts to avoid the tax, reducing the revenue raised by the tax and perhaps increasing, rather than reducing, the resources devoted to financial engineering. Further, most long-term studies of FTTs have shown no effect on market volatility or increases to it. New Jersey should not impose a tax that would hamper the functioning of the markets and hurt long-term investors. Empirical research has found that similar taxes imposed in other countries have reduced trading volume, impaired liquidity, and distorted price discovery. This tax could also cause the electronic infrastructure that facilitates transactions to migrate to lower-cost venues outside of New Jersey. Recommendation The Institute strongly recommends that the proposals to enact a FTT be rejected. At the very least, any FTT must not be extended to1940 Act-registered funds. Any such FTT would be borne by their investors—average Americans saving for their long-term needs. The unintended (and most unfortunate) consequence of this bill would be to harm moderate income Americans saving for retirement. * * * * * * * The Institute appreciates your consideration of our concerns. Please do not hesitate to contact the undersigned at (202) 326-5826 if you have any questions regarding this letter or would like any additional information regarding the organization, operation, or taxation of investment companies and/or their shareholders. Sincerely, Katie Sunderland Assistant General Counsel – Tax Law CC: Assembly Financial Institutions and Insurance Committee 7 For more information see ICI’s Financial Transaction Tax Resource Center at: https://www.ici.org/ftt