US Plans Tax On Futures Transactions

by Mike Godfrey, Tax-News.com, Washington

13 February 2002

A proposal in the US administration's 2003 budget to tax commodities futures transactions has drawn howls of protest from industry bodies.

The proposal calls for a tax of 14 cents on each round-turn futures contract and 7 cents on each round-turn option on a futures contract. It would apply to trades at the Chicago Mercantile Exchange and the Chicago Board of Trade, the traditional homes of futures trading in the US, as well as to transactions at other "approved exchanges", including New York's Nymex, the world's largest energy exchange.

The tax would take effect on April 1, 2003, and would generate about $70m in a full year, helping to finance the activities of the Commodity Futures Trading Commission (CFTC), which regulates the futures markets. But critics say it would raise the cost of doing business, discourage investors from using futures contracts to manage risk, and drive trade to the over-the-counter market and overseas exchanges.

"The imposition of a transactions tax would put the US at a competitive disadvantage and would drive customers out of these markets," said David Prosperi, CBOT spokesman. "Why should US regulators be helping drive the business to London (London International Financial Futures and Options Exchange - Liffe) and Frankfurt (Eurex)? The proposal really ignores the competitive realities of the marketplace."

The New York Merchantile Exchange issued a press release saying: "At a time when the New York exchanges are already under maximum economic stress . . . we are concerned that our own government may be responsible for enhancing the competitive advantages of both foreign and unregulated markets."

The budget that the administration sends to Congress at this time of year is however little more than a shopping list, and this proposal may not make it into law. Several previous attempts to tax futures trading have been seen off by the powerful industry lobby in Washington. Says John Damgard, president of the Washington-based Futures Industry Association: "Tax us on the money we make - not on how we make the money."

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