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The Tax Foundation is the nation’s
leading independent tax policy
research organization. Since 1937,
our research, analysis, and experts
have informed smarter tax policy
at the federal, state, and global
levels. We are a 501(c)(3) nonprofit
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Editor, Rachel Shuster
Designer, Dan Carvajal
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Washington, DC 20005
The Drawbacks of State Taxes on
• A financial transaction tax (FTT) would raise transaction costs, which
would result in a lower trading volume, lower liquidity, potentially increased
volatility, and lower price of assets. Lower volume limits revenue potential,
lower liquidity harms traders’ ability to buy and sell shares at the best price
level, and increased volatility can increase risks.
• An FTT might be targeted at limiting high frequency trading or speculative
short-term investment However, it is highly unlikely that an FTT would only
discourage “undesired” trading and would almost certainly result in a host
of unintended consequences. The tax code is, moreover, not an appropriate
policy tool to limit certain financial transactions.
• Estimating revenue from a state-level FTT is difficult given the unknown
reaction by the financial markets and high risk of tax avoidance.
• States can either tax financial transactions by taxing data processing or stock
exchanges, or tax the trader buying and selling financial products. States can
either levy the tax at a flat rate or by value (ad valorem).
• An FTT results in a version of tax pyramiding as the same instrument is traded
multiple times, meaning that even at low rates, an FTT would add a significant
If several states implement FTTs, the transfer of a security being taxed
multiple times could emerge. A trade could be taxed by the home state of the
buyer or seller, by the state that hosts the data processing centers, and b