The U.S. Senate recently passed the Marketplace Fairness Act, which would force online retailers to collect sales taxes for states in which purchasers reside. Most have heard how this will hit us when we purchase goods over the Internet. But a lesser-known problem is the legislation also would enable states to levy new taxes on 401(k) and other savings vehicles.
How? The bill authorizes states to “require all sellers not qualifying for the small seller exception [$1 million in sales or less] to collect and remit sales and use taxes with respect to remote sales sourced to that Member State.”
No Definitions or Exemptions
Yet “sellers” and “sales” are never specifically defined, and there are no specific exemptions for certain types of products or services. Financial experts say this means states could tax “sales” such as stock trades in a mutual fund or brokerage account, or even contributions to pension plans such as 401(k)s that were designed to be tax-free until retirement.
The American Society of Pension Professionals and Actuaries, a group of more than 11,000 retirement plan and benefits professionals, warns the bill “would allow states to impose a financial transaction tax that would apply to American workers’ 401(k) contributions and other transactions within worker’s accounts.” The group notes “over 70 million workers could be affected” by such taxes, which “could significantly reduce workers’ savings over time, threatening their retirement security.” The group calls for “a clear exception” for transactions within a 401(k) account.
This is not the only financial service the bill could enable states to tax, a prominent taxpayer advocate suggests. Grover Norquist of Americans for Tax Reform asks in a letter to Sen. Mike Enzi (R-WY), a chief GOP proponent of the legislation, “Will financial products that are sold over the Internet, such as portfolio management services, credit reporting service apps, or insurance service, fall under MFA taxation authority?”
State-Level Transaction Taxes?
The Securities Industry and Financial Markets Association (SIFMA), representing securities firms and asset managers, issued a statement urging hearings on the MFA’s impact on financial services. As written, “the bill could lead to unexpected costs being passed on to consumers of financial services, including sales taxes on services or state-level stock transaction taxes,” the group said.
Similarly, The Financial Services Roundtable, which represents banks, insurance companies, and brokerage firms, states these concerns: “A transaction tax on financial services products will hurt retail investors, retired Americans, and small businesses, effectively making it more expensive for them to invest and plan for the long-term. Without hearings, these implications and others will not be properly addressed.”
These potential scenarios, taken seriously by financial policy experts, illustrate the inherent problem of the bill. Forcing a business without any physical presence in a state to tax that state’s consumers is taxation without representation. As my colleague Jessica Melugin, an adjunct fellow at the Competitive Enterprise Institute, has written, “This bill would undermine that federalist principle by allowing one state to reach into the borders of another and tax businesses that have no political voice in the taxing state.”
Encroachments of Other States
As Melugin concludes in a Washington Times op-ed, state sovereignty does not just mean protection from the interference of the federal government. It also means freedom from encroachment of other states.
“The legislation does away with the crucial notion that one state’s sovereignty stops where another state’s begins,” she writes. “Under this cartel, state tax laws extend everywhere commerce happens on the Internet.”
And as we are just now finding out, that “everywhere” could include your 401(k) account, individual retirement account, and mutual fund. So to borrow a phrase from investing, the House needs to undertake some much-needed due diligence on this bill, rather than rushing it through as the so-called upper chamber has done.
John Berlau ([email protected]) is a senior fellow for finance and access to capital at the Competitive Enterprise Institute. Used with permission of CEI’s OpenMarket.org blog.