State interchange laws could have severe consequences

The Common Sense Institute, a think tank focused on free-enterprise economics, has been studying the likely outcomes of state laws that would ban interchange on the tax and/or tip portions of card payments. And the scenarios seem grim. While the laws are sold as financially beneficial to merchants and consumers, the analysis suggests the costs in terms of economic impact are anything but beneficial.

Illinois was the first state to pass such legislation. That state's Interchange Fee Prohibition Act would prohibit interchange on the tax and tip portions of credit and debit card transactions. The law was set to take effect on July 1, 2026, but has been put on hold while legal challenges are decided on appeal.

Colorado, the latest state to pass such legislation, would ban interchange on the tax portion of a card transaction and is awaiting Governor Jared Polis's decision to sign or veto it.

While exact costs are difficult to calculate, CSI used various methods last year, including experience with systems needed to comply with EMV, to assess the potential cost of the Colorado law.

"Absent any definitive pathway to implementation of the IFPA, this cost estimate is highly speculative but demonstrates the potential magnitude of additional costs that significant changes to payment systems can impose on users," CSI cautioned in its report.

CSI said its simulation found the Colorado law would result in a $1.43 billion loss in state's gross domestic product over five years, and a $1.1 billion loss in total personal income, which works out to a total loss of more than 200 percent of the cumulative savings merchants would see as a result of the law over five years.

Iowa analysis reveals one-year costs

CSI also assessed the costs of similar legislation (prohibiting interchange on tax portion of transaction) which has been approved by the Iowa House of Representatives. That legislation, if enacted, could cost the state's economy an estimated $67 million in economic output and 350 jobs in year-one alone, the think tank reported.

CSI estimated Iowa's proposed legislation would generate rough $36.2 million in merchant savings statewide, or about 0.06 percent of the state's total taxable sales. However, the report projected that necessary upgrades to merchant POS systems and payment infrastructure changes needed to comply could cost $82 million, which far exceeds the projected savings. On a per-merchant basis, the savings would be small, CSI reported: about $220 a year. The savings also would be heavily concentrated among the largest merchants, roughly 8 percent of merchants in the state would receive 65 percent of the total savings.

Perhaps most telling, however, for 42 percent of smaller merchants, it could take a decade, or more, for savings from any such law to offset implementation costs.

Could it ever really happen?

All of this is speculative, of course, as no such law has yet to take effect. And as CSI concluded in its report, "there is significant skepticism" as to whether such a law ever could be implemented.

"The difficulty with laws like the IFPA is that they impose state specific restrictions on a system that is set up to function across the globe," CSI wrote. "Modifying that system to accommodate the regulations in a single state within a single country is likely cost prohibitive for the parties involved."

Worse, financial institutions and their processing partners could altogether refuse to accommodate credit and debit card acceptance in a state that implemented such restrictions. "It goes without saying that the economic consequences of this would exceed the estimates discussed here by orders of magnitude," CSI concluded in its report on the Colorado law.

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