Gus Carlson is a U.S.-based columnist for The Globe and Mail.
When it comes to the well-documented dangers of biting the finance industry hand that feeds them, governments either don’t get it or don’t care – or maybe it’s a bit of both.
How else to explain the potential damage of Chicago’s proposed transaction tax on derivative firms that have been the lifeblood of the city’s US$75-billion financial services sector for well over a century and employ nearly 60,000 people? If implemented, the tax would mean back-breaking cost increases for firms, higher fees for customers, job losses, and might finally prompt some corporate leaders who have long complained about the city’s crime, homelessness, crumbling infrastructure and increasingly anti-business policies to leave.
The move is not the first time a government has squeezed the finance sector to cover up its own incompetence, fuelling economic risk. Chicago’s new mayor, Brandon Johnson, doesn’t need to search too hard for cautionary tales as he mulls covering Chicago’s huge budget deficit and slowing the city’s tailspin into what economists call a “doom loop” – as more residents and businesses leave and less development occurs, the property tax revenue stream decreases, often rapidly.
Just last month, Italy shot its own economy in the foot with both barrels by introducing a 40-per-cent tax on bank profits. The move triggered a crash in bank stocks, including a single-day loss of €10-billion, forcing the government to walk back the tax to a cap of 1 per cent of bank assets.
If Mr. Johnson looked across Lake Michigan, he would find some guidance from Canada’s stumbles on this front, too. In 2021 Ottawa moved to increase the tax rate on banks and insurance companies to 18 per cent from 15 per cent and impose a five-year, 15-per-cent Canada Recovery Dividend Tax on taxable income over $1-billion. While pushback prompted the government to ease up on that proposal in part, Ottawa drew harsh criticism by tightening the tax vise again earlier this year, changing the way it treats dividends from Canadian shares held by financial institutions.
Mr. Johnson’s proposed strategy is less about big swings of the tax axe and more about generating revenue by lots of small cuts. He wants a US$1-$2 levy on every securities contract trade. Considering the huge annual trade volumes handled by Chicago’s big derivatives and commodities firms, such as CME Group and Cboe, that’s not exactly chicken feed.
On top of that, there are whispers Mr. Johnson may impose a head count tax of US$4 per employee on big companies and a mansion tax on houses priced over US$1-million.
Like Italy’s move – and possibly Canada’s, had it not walked some of it back – Mr. Johnson’s proposed tax measures will have dire consequences. Combine them with Chicago’s reputation as an increasingly sketchy place to live and work, and there is every reason to believe some of the affected firms may follow big-name companies like Boeing, Caterpillar, Tyson Foods and Citadel out of the city.
Hastening the exodus, low-tax business-friendly states like Florida and Texas have been actively and openly cultivating companies from states such as Illinois, New York and California – and specific regions such as Silicon Valley – with juicy incentive packages and lifestyle lures. At some point, some Chicago finance firms may decide history and loyalty don’t pay the rent, and head south.
To be sure, Mr. Johnson, a progressive Democrat, has backed himself into a corner in terms of finding ways to balance a city budget left in tatters by his predecessor, Lori Lightfoot, whom he defeated in an upset. In his campaign, he promised not to raise property taxes and vowed the lower and middle classes should not bear the brunt of the solution.
That may be an ideologically noble stand, but it leaves him fewer reservoirs of funds to tap, and the city’s finance industry seems an obvious target for an extra US$100-million or so, the expected annual take from a transaction tax.
Interestingly, a loud voice of dissent is that of another high-ranking Illinois Democrat: Governor J.B. Pritzker. He has expressed concerns about the transaction tax as a catalyst to drive more companies from the state.
Mr. Pritzker, who has ultimate say-so over the proposal, clearly worries such a tax would be a step backward for his ambitious Rebuild Illinois revitalization plan aimed in part at reversing exactly the outflow of commerce the new tax may incite. Perhaps the Governor, at least, has been reading the international headlines