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April 1, 2010

Tax With Nine Lives Appears Dead

By Gregory Bresiger

The proposed 0.25 percent securities transaction tax, or STT, is dead in Congress--at least for now. But opponents warn that the idea could be resurrected and dropped into almost any bill, as the U.S. government seeks new sources to close record deficits.

Peter DeFazio, D-Ore.

Still, others believe that the tax just won't happen this year. That's good news for prop traders and high-frequency traders, whose profit margins are razor-thin to begin with. The tax, many fear, would push them out of the market and decrease liquidity for all investors.

Next year, however, is another story. But for now, the STT is a back-burner issue, sources say.

"The 0.25 percent is not going to happen," said Paul Zubulake, a securities industry analyst with Aite Group. "That would have had a devastating effect on the industry. But a smaller STT could still happen." He said the government's need for more revenue could lead to new forms of taxing Wall Street.

Rep. Peter DeFazio, D-Ore., sponsors the STT bill, HR 4191. Money generated by the tax would pay down the debt and create public sector jobs. The STT would be imposed on "stocks, futures, swaps, credit default swaps and options," according to the bill.

In public statements, DeFazio has argued that the proposal is fair because the government "bailed out" the securities industry during the 2008 market meltdown. But the securities industry has argued that the STT would have the unintended consequence of hurting the individual investor.

"For fund investors, a securities transaction tax would raise the cost of trades that a fund can make for its portfolio and would depress fund returns," said Paul Schott Stevens, president and CEO of the Investment Company Institute.

Although the DeFazio bill, along with another STT plan in the Senate, has not cleared committee and has few co-sponsors, many in the trading industry fear that the idea of making Wall Street pay higher taxes will eventually succeed.

"It's still a politically popular thing to tax Wall Street," said a lobbyist for the Securities Traders Association. Added STA president and CEO John Giesea, "We're still taking this very seriously."

DeFazio says HR 4191 would have "a negligible impact on the average investor and pension funds."

The bill would exempt from the tax the first $100,000 of transactions. DeFazio concedes the bill will have a tough time of it because it has been introduced late in the congressional session. A spokeswoman for him said the bill is now pending in the House Ways and Means Committee. She said it was not clear when the committee will hold hearings on the bill.

The bill has some supporters in the securities business, notably fund industry critic John Bogle, founder of the Vanguard Group of Funds.

Bogle backs it because he believes it will discourage high-frequency traders. That would "slow the rampant speculation that has created such havoc in our financial markets," according to Bogle.

The other STT bill, SB 2927, introduced in the Senate by Sen. Tom Harkin, D-Iowa, would also apply the tax to a broader class of derivatives. It would offer different tax exemptions, one of which would be IPOs.

"The senator remains committed to the bill," said a spokeswoman for Harkin. She said SB 2927 has three co-sponsors. "The bill is now in the Senate Finance Committee, and we are waiting for them to act."

A committee spokesman said no immediate hearings are scheduled for SB 2927.


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