The 6 1/4 Cent Solution,

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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.”