After threatening to leave Illinois over an increased tax burden, it appears CME Group and CBOE Holdings Inc. likely will be staying put, thanks to a recently agreed upon $100 million a year tax break for the two exchanges and Sears. The threatened exit came after the cash-strapped state increased corporate tax rates from 7.3% to 9.5% earlier this year.
Andy Nybo, principal and head of Tabb Group’s derivatives practice, says it was critically important for the state to keep the two exchanges in Chicago. "CME and CBOE are icons of the financial markets, particularly the derivatives markets. They give a huge presence to Chicago," he says. "Not only do they pay corporate taxes, but they have a huge number of employees based in Chicago and significant physical infrastructures that they’ve built, maintained and improved every year. The trickle-down effect of CME and CBOE being located in Chicago is quite substantial."
At the core of the tax agreement is an allowance that slashes the number of electronic trades that the exchanges must pay taxes on from 100% to 27.5% because the exchanges argue that the majority of trades come from places outside of the state.
This was a key element of the argument, because it cited unfair treatment in how trades were measured, making their burden unusually large as opposed to simply a big corporate player leveraging their power to get a special break. It did not quite play out that way as many additional tax breaks were being tied to it, causing the measure to be rejected several times.
Nybo says their argument really is a sign of the times in that effectively all markets are electronic in nature. However, he also says it’s thanks to their electronic nature that they’ve become so successful. "The markets of today are electronic and that’s why they are able to generate such high amounts of revenue from their trading activities," he says.
Spokesmen from both CME Group and CBOE declined to comment.
The original tax break failed to get through the Illinois House because a provision to adjust the earned income tax credit could not pass. That provision now is part of a separate bill. The Illinois House passed the new bill on Dec. 12 and the Senate will vote on Dec. 13.