October 1996
The 6 1/4 Cent Solution
by James Bradley
For years, Mayor Giuliani has contended that the only way to close the city's budget deficit is to cut services. But a lot of people outside the administration maintain that a boost in revenues clearly is needed to address the structural imbalance in the city's budget.
So far, devising a politically feasible plan to raise revenues without antagonizing wage-earners, small businesses or property owners - creating a popular tax - has proven to be a futile quest. But now a coalition of labor leaders, grassroots organizers, public officials and academics says it has the answer: A stock transfer tax, which would be levied a few pennies at a time on each Wall Street stock trade.
Not that it's a new idea. The tax has actually been on the books for some 30 years, but due to a deal hashed out between the city and securities firms in the mid-1970s, only a token amount has been collected. The result has been a huge revenue loss for the city: It's estimated that the stock transfer tax could be generating anywhere from $3.6 to $4.1 billion a year, enough to wipe out the current deficit and still have enough left over to invest in meeting vital social and economic needs.
"If there remains a structural problem with the budget next year, we're going to be forced to look at the revenue side, and this may be one of the things you could get people behind," says Ed Ott, political director of Local 1180 of the Communications Workers of America, who has been pushing the plan along with Brooklyn Councilman and Democratic mayoral hopeful Sal Albanese.
Earlier in the year, Albanese assembled a group of academics, led by Bill DiFazio of St. John's University and Stanley Aronowitz of CUNY, to explore what kind of revenue the stock transfer tax could generate. Armed with research and a series of proposals on how the tax could be implemented, Albanese and others are trying to put together the same kind of grassroots coalition that helped pass the city law establishing a living wage for private-sector workers on some city contracts.
"We're trying to get people to take this seriously," says Bill DiFazio. "This city has to be rebuilt.... Schools, parks, and housing. We must create a political climate that forces Wall Street to pay their fair share."
But any such plan is likely to incur the full opposition of Wall Street and the political institutions swayed by high-powered corporate lobbying. And some fiscal experts say the plan will only hurt New York's long-term economic future and add to the city's structural deficit.
"It's hard to imagine that this economy can bear the weight of an additional $4 billion in taxes," says Dean Mead of the watchdog Citizens Budget Commission. "I question relying on as volatile a base as the securities industry for funding. The city's already struggling over a very heavy tax burden."
Handed Right Back
The stock transfer tax is basically a sales tax on Wall Street. Any stock transaction involving the New York Stock Exchange, American Stock Exchange or NASDAQ is subject to the tax, which ranges from as little as 1.5 cents for each share of inexpensive stock to 6.25 cents a share for more valuable issues. The levy would likely be capped at a maximum of around $400-per-transaction - even if a transaction involves millions of dollars worth of shares.
Creating this new system would be easy, because the tax is technically already in effect. In an incredibly illogical system that would have made Rube Goldberg giggle, the money is currently tallied, assessed, collected - then handed right back to the brokers who paid it.
"Usually, the investors get it back the same day," explains Frank Mauro, executive director of the Fiscal Policy Institute, an Albany-based think tank. "The broker fills out a return, and the state wires the money right back." Mauro says that the state must momentarily take possession of the tax to fulfill the arcane requirements of its bond agreement with the Municipal Assistance Corporation.
Under the Albanese plan, the rebate would end, although exemptions would be created for some stock issues. In order to discourage speculation, supporters are also considering tying the tax to trading volume: the lower the trading volume, the lower the tax. A side benefit of the plan would be to lessen the frenzied volatility that has periodically gripped the market since the 1989 crash. Alan Blinder, the former vice chair of the Federal Reserve Board told the Senate Banking Committee in 1994 that "a small tax that inhibited short-term trading, but had negligible effects on long-term returns, would help....[in] diminishing market volatility."
But in order to get the tax, the proposal will have to be approved by the state legislature, which has shown no inclination to hike any taxes in recent years. Even if the plan makes it through the Democratic-controlled Assembly (and the measure has yet to attract a sponsor there) its chances of being approved by the GOP-controlled state Senate or anti-tax Republican Governor George Pataki seem extraordinarily slim.
The battle has been fought before. On several occasions, going as far back as 1933, mayors have advocated stock transfer taxes, only to back down when the New York Stock Exchange threatened to leave the city. But it wasn't until 1966 that the Lindsay administration called Wall Street's bluff and succeeded in convincing state legislators that the city needed a stock transfer tax.
None of the exchanges made their promised exit, but in 1977, they were able to convince Governor Hugh Carey, with Mayor Abe Beame's support, to sign a law phasing out the tax and initiating the pointless pay-and-refund system that exists today.
As part of the deal, Wall Street agreed to allow the city to collect $116 million in stock transfer taxes. At the time, that was not an insignificant amount. But the $116 million annual figure has remained constant while the Dow Jones Industrial Average has skyrocketed, rising from 1100 points just 12 years ago to nearly 6000 today.
The result? A $3.9 billion tax-exemption windfall for brokers and stockholders.
So far, labor unions and grassroots groups like the Industrial Areas Foundation have expressed interest in building support for the stock transfer tax. But the issue has not been able to generate great enthusiasm. "It's hard to get people emotional about [the tax]," says Sal Albanese. "The issue is a little esoteric; there's no real catalyst."
Mustering Support
The coalition-building and public information campaign required to make the idea fly will be slow and supporters of the tax say they aren't planning to rush it onto Albany's agenda until they've mustered the support they need. But Albanese believes that if the city's long-term budget woes persist - and almost every major fiscal monitor believes they will - interest in the idea will grow.
"This offers a vehicle for alleviating some of the pressure that's being applied to small businesses and average New Yorkers," he says. Albanese also thinks that linking the implementation of the stock transfer tax with the elimination of unpopular levies, like the unincorporated business tax and the clothing sales tax, will help.
Nonetheless, some progressive analysts suggest Albanese and the IAF would be better off focusing their efforts on other ways of raising revenue - such as putting tolls on bridges, which has more mainstream support, at least among the majority of New Yorkers who don't own cars. "The politics of the stock transfer tax is so overwhelmingly bad," says Glenn Pasanen of City Project, a budget watchdog group. "Like so many attempts to tap the corporate revenue base, the claim from the corporate community is, it can't afford it, and if pushed it will move out of the city."
Albanese, however, hopes to avoid the perception that he's simply a populist politician proposing to soak the rich. The stock transfer tax is a matter of fairness, he says, and smart economics.
"We have to say to Wall Street, 'This is the premier city in the world, you have a stake in the future viability of this city,'" he says. "This is just giving a little bit back."