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Tax hikes threaten Illinois-based corporations

By Kofi Amoabin
On October 10, 2011

The CME Group, which runs the Chicago Mercantile Exchange and Chicago Board of Trade, may leave the city in the face of tax hikes after more than a century and a half as the landmark of Chicago's financial district.

Mayor Rahm Emanuel, Governor Pat Quinn and the Illinois legislature are looking for ways to ease the impact of the recent increase in corporate income taxes on CME Group, which has threatened to leave Illinois without relief.

"Our tax situation is untenable," said Craig Donohue, CEO of CME told reporters this summer.

In January, the Illinois legislature raised the state's corporate income tax rate by two-thirds, from 4.8 to 7 percent. A pre-existing 2.5 percent corporate personal property replacement tax pushes the overall corporate rate to 9.5 percent – the third highest in the U.S. behind Pennsylvania (9.99 percent) and the District of Columbia (9.5 percent.)

Gov. Rick Perry of Texas, who is running in the GOP presidential primary, has even compared his state's lower taxes to the situation in Democrat-controlled Illinois.

Recent studies have shown, however, that most large Illinois-based corporations do not pay income taxes at anywhere near the official rate. Large manufacturers such as Boeing and Caterpillar, for instance, tend to book sales elsewhere, and because Illinois imposes its income tax taxes only on profits from sales within the state, these companies pay substantially less than if all their profits were taxed.

The CME Group, in contrast, executes the vast majority of its millions of daily trades in Chicago.

CME Chairman Terrence Duffy recently told reporters that the way Illinois apportions income tax liability puts his exchange at a distinct disadvantage. If Caterpillar sells earth-moving equipment to an individual living outside Illinois, the transaction does not incur state taxes in Illinois.

So the CME Group is looking for relief. Under one scenario, its trades could be recorded in the home state of the buyer or seller of the futures contracts. Under another, the state and the city could provide a package of economic incentives-job training grants, TIF financing, property tax abatements – to partially offset the income tax hit.

The latter tactic would tide over the CME until the tax increase is due to expire in three years, although not everyone believes the state's finances will be healthy enough by then to let the tax hike expire under an existing sunset clause.

"The tax increase is temporary, and it will expire in four years, unless the legislature votes to re-authorize it," explained Kathryn Phillips, Deputy Chief of Staff for Communications under the Office of the Lieutenant Governor.

It would be unconstitutional for the legislature to specifically exempt CME, or any company, from taxes that apply to all others. However, the legislature could vote to tax only the revenue derived from trades initiated within the state. In its annual report for 2010, CME executed 3.078 billion trades at average revenue of $0.808 per trade.

CME owns the New York Mercantile Exchange and COMEX in New York. Trades executed on the electronic trading platforms of the exchanges in New York are subject to Illinois tax.

"We'd like to stay in Chicago but are concerned about the corporate tax increases," Shore said.

If amending the income tax laws proves impossible, the state may turn to its a la carte menu of company-specific incentives.

When Motorola split into two – Motorola Mobility and Motorola Solutions – Motorola Mobility got $100 million in incentives to stay in Illinois. In July, Warren Ripley, director of Department of Commerce and Economic Opportunity announced Illinois incentives have created 30,500 jobs and led to $4.23 billion in business investments.

CME offers the type of high technology, finance and computer related jobs that provide unique prospects for DePaul students in these fields. CME offers internships that have served students in building, exploring and networking for future careers. If the company moves, some of the opportunities will be lost to students in CME's new location.

Mayor Rahm Emanuel served as a director of CME from 1999 to 2001 and sees the exchange as the bedrock of Chicago's economy, and to some extent, that of the state of Illinois. In June, when Texas, New Jersey and others talked about luring CME, Emanuel told reporters he is confident CME will stay. CME also was one of the biggest corporate contributors to the mayor's election campaign.

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