The Government Finance Officers Association (GFOA) endorses the national policy goal of reducing the federal deficit. Tax increases may be necessary to accomplish the elimination of the U.S. budget imbalance. One proposal under consideration is the Securities Transfer Excise Tax (STET). The economic impact on state and local governments of any new tax must be carefully studied before enactment. The proposal to tax the transfer of securities (including stocks and bonds) has drawn the attention of the GFOA because of its numerous negative impacts on state and local governments and because its effect on state and local governments would be inconsistent with general principles of intergovernmental immunity. Such a tax could

• increase the cost of capital for state and local governments which is needed to build and repair the nation's infrastructure because investors will demand higher interest earnings to compensate for paying the tax,
• skew short-term investment decisions by discouraging public investment officials from actively managing their portfolios in order to avoid taxation, and
• reduce the investment earnings of public employee retirement systems in the securities markets resulting in either increased pension funding costs for state and local government retirement systems or reductions in pension benefits for state and local government workers.

The GFOA, therefore, opposes the imposition of a STET on state and local government securities and on state and local government investments in securities subject to the tax.

• Publication date: June 1987