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CME Group, CBOE Holdings: Tax Breaks Needed To Stay Put In Illinois

Cme Group Tax Break

By DAVID MERCER   11/25/11 03:53 PM ET   AP

CHICAGO -- John Schneider's work is all shouts and hand gestures. Get him on the phone and you'll strain to hear over the barks and cries of his fellow commodities traders in the corn pit at the Chicago Board of Trade.

The board's art deco building has long been an icon, and Schneider compared it at its founding in 1848 to a business like Groupon Inc. today – operating on the economic frontier and pushing Chicago toward its future. Even as the shouts and gestures gave way to the bits and bytes of modern electronic trading, the Board of Trade and the city's other exchanges had a strong hand in making Chicago the financial center it's become.

But two exchanges, the CME Group Inc., which owns the Board of Trade and the Chicago Mercantile Exchange, and CBOE Holdings Inc., have threatened to leave the state unless they're given significant tax breaks to make staying worth their while. They say a big tax increase enacted this year and what they say are inequalities in the tax code have forced them to pay an outsize share of the state's corporate income taxes.

Lawmakers are returning to Springfield on Tuesday to consider special deals to cut the exchanges' tax bills, and the price tag for the financially-strapped state could reach well into the hundreds of millions of dollars. They must decide whether Illinois, where the unemployment rate is just over 10 percent, can afford to give in to exchanges that may no longer need Chicago as much as it needs them, or whether to take their chances that the companies will stay put without new deals.

While some question whether the exchanges would really move, in Schneider's mind, not trying to accommodate them would send a signal that Illinois is no longer the kind of place where the exchanges were born.

"If you can't hold onto a 150-year-old institution, then what's next?" asked Schneider, who works for League Trading. "Would stuff like this stifle companies like Groupon from starting?"

The exchanges are just two of the major Illinois-based businesses that have threatened to walk away from the state this year, demanding tax breaks and other perks. The legislative package also includes breaks for Sears Holding Corp., which has warned of moving its headquarters out of the Chicago suburbs.

The exchanges say it's unfair for the state to tax their trades as if they all happen in Illinois, when the buyers and sellers in electronic trades are often somewhere else. CME Group says it pays close to six percent of all corporate income taxes in the state. It doesn't provide a dollar figure, but the state collected a total of $1.67 billion in 2010; six percent of that would be about $100 million.

The proposed tax package "reflects the global nature of the financial markets and puts the exchanges on more equal footing with other Illinois companies and other U.S. exchanges," CME chief financial officer Jamie Parisi testified at a hearing in Springfield. Neither CME nor CBOE would comment directly for this story.

CME employs about 2,000 people in Chicago while CBOE has about 500 workers in the city.

The companies are pressuring a vulnerable state. Illinois raised its corporate tax rate in January from 4.8 percent to 7 percent to help deal with a massive budget deficit.

That multi-billion dollar means Illinois can't afford to cut any company a break, University of Illinois economist Fred Giertz said, but the tax increase leaves the politicians in a bad position to make a stand.

"I think people who voted for the tax increase also want to not be blamed for having these services and industries leave the state," Giertz said. "You have to stand up at some point (and say no), but it's not easy to do that."

It isn't clear whether the exchanges would really leave. Moving is expensive and disruptive and experts say companies often threaten to pack up for a new location with little intention of doing so, just to force government to come through with deals to keep them in place.

A spokesman for a union that represents thousands of government workers in Illinois said the companies are taking advantage of Illinois, and that lawmakers should find other solutions.

"Rather than holding taxpayers over a barrel and demanding giveaways for themselves, responsible employers that feel they are taxed inordinately should blame the two-thirds of Illinois corporations that pay no state income taxes at all," said Anders Lindall, a spokesman for the American Federation of State, County and Municipal Employees, referring to a figure often cited by some of the biggest backers of the tax breaks, including state Sen. President John Cullerton.

But if any businesses could easily relocate, it might be the exchanges. Their electronic trades could be conducted almost anywhere. There are no assembly lines to move, no raw materials they need to be near. "You can process orders virtually any place," Giertz said.

Indiana reportedly has extended an offer to the CME Group, hoping to lure it away. Officials with the CBOE – a smaller exchange that says it paid $13.7 million in state taxes in 2010 – have said they've talked to several states.

Legislators are still working on the tax break package, but last week the governor's office put the cost to the state on one version at $850 million a year, starting three years after passage. The package has grown to include provisions for Sears, low-income taxpayers and others to broaden support for it.

The Board of Trade was founded in 1848, the same year the Illinois and Michigan Canal opened, linking the Chicago River and Lake Michigan with the Mississippi river. The farms to the west flooded the city with crops and livestock destined for the East Coast and beyond, and the exchange smoothed the buying and selling through futures contracts that allow commodity prices to be locked in in advance, avoiding price swings.

Along with that trade, the city quickly grew, from about 30,000 people to roughly 300,000 in two decades. "The Board of Trade became the commodities trading center of the world, basically," said Carl Smith, a professor of American Studies at Northwestern University.

The Mercantile Exchange began in 1898 as a Board of Trade spinoff, the Chicago Butter and Egg Board. Similarly, the Board of Trade opened the Chicago Board Options Exchange, or CBOE, for the trading of stock options in 1973.

The exchanges mean jobs in Chicago, with the area around the Board of Trade full of financial firms and restaurants that cater to the traders. But there's also a symbolic and psychological aspect to the exchanges having called Chicago home for so long.

"CME's position is that, given the choice, it would prefer to stay in Illinois," said John Carpenter, senior vice president of the Chicagoland Chamber of Commerce. "Chicago is a great place to do business for them."

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Associated Press writer Tammy Webber contributed to this report.

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