The Power of Taxation

The Lazer Speaks

   The pandemic has produced some negative budgets for state governments, and while the presidential election has produced some hope that they might get bailed-out, states are looking for ways to plug the budget gaps. If you have watched a basketball or hockey game in New York, you can’t get past a timeout without a commercial for a gambling app. Which is interesting because gambling still isn’t legal in New York. But it is in New Jersey. And New York is just salivating at the prospect of adding those taxes to its revenues.

Another big item on the agenda is legalizing marijuana. Notwithstanding the fact that there are people who have been sent to jail for decades for smoking a joint back in the day, the state governments see pot as a way to, well, refill their pots during these dry times. Both gambling and pot production and sales would be new revenue sources, and it would take away from the “tax the rich” rhetoric that typically gets rolled out during these times. Not that taxing the rich is off the table, I fully expect to see proposals drafted soon.

One other potential tax opportunity for state governments was bandied about recently with some very high-profile public posturing by both the states and those that would be taxed, and that’s taxing high frequency trading. Taxing trading beyond the capital gains structure currently in place is never a good thing, and in most cases, removing these types of taxes usually results in a much more robust Capital Markets infrastructure with increased liquidity and better markets for all investors and traders. Nevertheless, state governments taking advantage of situational opportunities like the GameStop trading scenario see dancing dollar signs to help bolster state revenues with what they perceive as achieving a social good as a kicker.

And that is what happened recently as both New Jersey and New York floated the idea of taxing short-term, high frequency traders, both professional and retail. As soon as they did that, all the players began to position themselves against such a tax. They pointed out all sorts of evidence that the taxes would hurt the U.S. markets, and I believe them to be correct, because money will flow to wherever there is the least amount of friction.

The Exchanges and other key players also pointed to the ubiquitous nature of technology today and how easy it is to move a datacenter to another location outside the jurisdiction of the taxing authority. And that is certainly true, look no further than Cloud providers to prove that true. But because of the unusual nature of equity trading and the need for speed and low latency, almost all primary data centers are located in the Northeast, and not just the Northeast but in New Jersey and New York, all within about thirty miles of each other. One of them could never move, because the others would have a latency advantage. But if they all moved, well then maybe that might work. And to prove their point some conducted business for a day or week in their out-of-town backup locations. You know, the ones they pay as little as they can for, and hope to never use.

Unfortunately, when this gang got together, they all decided to accept an invitation from Texas to come down and check out the great state. You see Texas told them that they would never tax them, that they had unlimited power, and heck, Texas is so big, that y’all can come down.

If you have ever visited a datacenter, and trust me there is no reason to ever, you would note that a datacenter is nothing more than a power station that takes in raw power and breaks it down into usable parts. And power is the key, because it’s needed not just for the computers but for the air-conditioning to keep the computers from over-heating. I was part of the team that helped with the NYSE’s Mahwah facility. I wasn’t crazy about the site because it sits close to a nuclear plant (Indian Head) and on an earthquake fault line. Yes, New Jersey and New York get earthquakes, but they are typically so small you don’t feel them. But the thing that it does have is this – it sits on the crosshairs of two separate national power grids. And remember, datacenters need power.

Which brings me back to Texas. My heart goes out to the residents there who are suffering and, in some cases, dying because they lost power. Not some power, but all power. And since they operate their own grid, there was no way to connect to another one and get power. I hope they get that corrected and remember that black swans have a way of appearing no matter what you think. In the meantime, it puts the Exchanges in an awkward spot because this was their main leverage with New Jersey and New York. They ain’t moving to Texas anytime soon, that’s for sure.

So, will New Jersey and New York add taxing trading to gambling and pot? Who knows, but one thing for certain, they are holding more cards than they were when they were first dealt.

 By Lou Pastina

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