Economic Development Mon Jun 13 2011

Pardon the Incredulity: Chicago Mercantile Exchange Threatens to Leave

By Ramsin Canon

This week the Chicago Mercantile Exchange, a major commodities derivatives and futures exchange, announced it may leave Chicago and is trying to sell one of its buildings. Citing their tax burden as too onerous, they stated that they may have to move out of state to protect their shareholders. If the story seems familiar, it is because it almost identical to the story heavy equipment manufacturer Caterpillar played out in the press a few months ago.

CME's threat/lament is specifically focused on the Illinois corporate tax code that taxes certain of their revenue-generating instruments, particularly since many of the customers who use the Exchange are in state--and more and more of them are set to move in state, trading from the Exchange's new data center in Aurora.

Tribune reporter Melissa Harris soberly considers what may be behind the threat, considering it specifically as a maneuver:

The familiar storyline thus far has gone like this: A large corporation threatens to leave Illinois, forcing Gov. Pat Quinn to swoop in with a financial incentive package and save the day.

The latest is CME Group Inc., parent company of the Chicago Mercantile Exchange and Chicago Board of Trade, whose chairman, Terrence Duffy, threatened last week to move at least some of the exchange's jobs out of state after Illinois temporarily raised its corporate income tax in January.

Harris' stubbornly realistic treatment of the CME's threat is refreshing. After all, the Chicago Mercantile Exchange gave Rahm Emanuel $200,000 just months ago--one of his largest campaign contributors and a key early giver. It was one of the largest donations to a single candidate in the last year and a half, which featured three highly competitive elections. While the increase in the corporate tax rate was not passed until January, Governor Quinn's proposal was known and moving as early as September of 2010 [PDF].

Where could CME move and remain in a market large enough to attract the talent and offer the amenities such a high-finance institution would require? New York and California's effective tax rates are very close to Illinois'. There's always Alabama though. I'm sure those finance grads will be climbing over each other for the chance to live in Huntsville. States are constantly being pushed to this "race to the bottom" by large employers who threaten to pick up and leave if they don't get tax "incentives."

Harris' piece suggests that what CME may really be looking for is a reapportionment to exempt some of its transactions from the corporate income tax. But who would have sympathy for CME, which less than two months ago posted yet another huge quarter, with their revenue reaching record levels and profits beating Wall Street expectations? How can they possibly portray themselves as aggrieved? They can't; but they can exploit the on-going anxiety about job losses. And the threat of a move provides political cover to politicians to lobby on their behalf while obscuring any quid pro quo.

It's just kabuki theater. CME is a winner in this economy, even with these increased taxes--passed, by the way, in part because of a deficit that was causing bond ratings to be slashed. But before Mayor Emanuel and the Chicago delegation in Springfield can put their names and resources behind any effort to reconfigure the tax code to benefit CME.

That isn't to say that Illinois' tax code is perfect, of course. While the absolute rate is obviously not hampering CME's ability to make stupendous profits, they are somewhat singled out by the tax code. Undoubtedly, CME's leadership and shareholders see the tax code as singling them out or punishing them. Their purpose after all is to maximize profit; they're a profit seeking venture. There is nothing immoral about corporate leadership wanting to protect their profit through self-advocacy. But we do not elect people to government to protect private profits. We elect them to balance a variety of social needs, including the types of services that protect the quality of life of the millions of us who have nothing to do with commodities derivatives. That their profitability is not absolutely maximized is not the concern of government, and we should not expect it to buckle to every threat.