Lawmakers in New York are toying with the idea of imposing a tax on stock trades in the hopes of collecting tens of millions of dollars in new revenue.

The problem for the politicians, though, is that while the markets may say they are headquartered on Wall Street, trading is almost entirely digital. This means moving the exchanges, and all those trades, and jobs, to more tax-friendly states, may be as easy as flipping a switch. The costs to New York would be substantial:

In New York, the securities industry generates an estimated 18% of state tax collections. In New York City, according to the U.S. Bureau of Labor Statistics, the finance and insurance industries are responsible for 60% of all private-sector wages. Common-sense tax policy helped create this benefit. A stock-transfer tax could destroy it.

Like most business taxes, the costs would be passed on to the customers:

The stock exchange and Wall Street generally won’t bear the burden of the tax. The end investor will ultimately pick up the tab. The levy would be explicitly passed back on customer orders. There is also an implicit cost as market participants forced to pay the tax incorporate it into their prices, raising the prices paid by individual investors. Vanguard estimates that a financial transaction tax of 10 basis points would force retirement-account investors to work roughly 2½ years longer before retiring to reach the same savings goals they might have achieved without the tax.

Moving an exchange is not an idle threat New Jersey’s flirtation with a tax on trades collapsed when the possibility of the traders leaving became clear. Then there are the European lessons of what happens when such taxes are imposed:

When France imposed such taxes in 2012, a third of the trading volume in French public companies moved to London and elsewhere, according to the Securities Industry and Financial Markets Association. Italy introduced one in 2013, resulting in a rise in volatility. When Sweden imposed a financial transactions tax in 1984, volume migrated to London until the tax was rescinded.

Albany may think it’s all a bluff, and there’s no way traders would abandon Wall Street.  They will, and a new, better, less expensive Wall Street will emerge in, say, Houston, or Miami.

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