Multistate: States Consider Financial Transaction Taxes; Taxes on Investment Income and Wealth

Listen to a brief overview of state tax developments this week, including this multistate update, or read full multistate development below.

Detailed Multistate Development

Certain states have recently proposed new taxes on financial transactions, such as stock trades, as well as taxes on wealth and investment income. In New York, Assembly Bill 5215 and Senate Bill 3980 would impose a new tax on each “covered transaction” with respect to any security. A “covered transaction” is generally a purchase of a security that has some New York connection (e.g., occurs or is cleared on an exchange located in New York or executed by a New York broker, or the purchaser or seller is a New York business or resident). The term security is broadly defined to include shares of stock, partnership interests, bonds, notes and derivative financial instruments, such as options, futures contracts, etc.  The tax imposed would be the applicable percentage of the specified base amount of such covered transactions. For example, for a stock sale, the specified base amount is the fair market value of the stock and the rate is 0.5 percent. Bonds and other debt instruments would be taxed at a 0.1 percent rate. Transfers of derivatives would be taxed at 0.005 percent of the premium or payment. A hierarchy would apply to determine who pays the tax on a particular transaction, and liability may attach to the facility where the transaction cleared, the broker, the purchaser, the seller, or the payor. Two other New York bills, Assembly Bill 3353 and Senate Bill 1406, were recently amended to repeal the provisions in New York law that have fully rebated the stock transfer tax that has been imposed on sales or transfers of stock in New York State since 1981. 

Outside of New York, New Jersey Assembly Bill 4402 and Senate Bill 2902 would impose a tax on persons or entities that process 10,000 or more financial transactions through electronic infrastructure located in New Jersey during the year. The tax rate would be $0.0025 per financial transaction processed through electronic infrastructure in New Jersey. The New York Stock Exchange reportedly operates a data center in New Jersey.  In Illinois, House Bill 283 would impose a tax on the privilege of engaging in financial transactions on the Chicago Stock Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade, or the Chicago Board Options Exchange. The tax rate is $1 for each transaction for which the underlying asset is an agricultural product, a financial instruments contract, or an options contract. The tax would be paid by the trading facility or the purchaser involved in the transaction. Transactions executed via open outcry that are physically filled on the exchange floor would be exempt from tax as would transactions involving securities in retirement accounts and transactions involving mutual funds.

In addition to bills aimed at taxing financial transactions, other states are considering legislation that would increases taxes on investment income or adopt taxes on accumulated wealth. In Illinois, House Bill 3476 and Senate Bill 2124 would impose a surcharge on an Illinois resident's low-taxed investment income (i.e. income treated as long-term capital gains under federal law). Two other Illinois bills (House Bill 3475 and Senate Bill 2121) would require Illinois residents with net assets of $50 million on December 31, 2020 or more to recognize gain or loss as if the assets were sold on that date, (i.e., mark-to-market).  New York lawmakers have also introduced bills to impose additional taxes on low-taxed investment income (Assembly Bill 3352 and Senate Bill 2522) to “correct the unfair federal tax benefit for income earned from investing, rather than working” and bills to tax residents with $1 billion or more in net assets on accumulated gains (Assembly Bill 5092 and Senate Bill 4482).  Moving across the country to the west coast, pending bills in Washington State would establish a one percent tax on intangible financial assets of more than $1 billion (House Bill 1406), impose an excise tax of 7.0 percent on certain net capital gains (Senate Bill 5096), and remove an exemption from B&O tax for investment income of other than individuals (House Bill 1111). Please stay tuned to TWIST for future updates on these proposals. 

This Week's Developments

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Featured Speaker

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US