On Monday the U.S. Senate 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 would hit American consumers when we purchase goods over the Internet. But a lesser-known problem is the legislation also would enable states to levy new taxes on their 401(k)s 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.” Yet “sellers” and “sales” are never specifically defined, and there are no specific exemptions for certain types of products or services.
Many financial policy experts now say this language would let states 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 that “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.
Yet this is not the only financial service the bill could enable states to tax, experts say. Grover Norquist of Americans for Tax Reform asks in a letter
to Sen. Mike Enzi, R-Wyo., 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?”
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.”
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 “did.
John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. He is the author of the book “Eco-Freaks.” Read more reports from John Berlau — Click Here Now.
© 2015 Newsmax. All rights reserved.