Lisle, Illinois ~ The worst credit rating in the nation. Unpaid bills in excess of $9 billion. A depleting rainy-day fund. Mounting pension debt. Schools and other vital social services struggling to keep doors open. More than a year without a state budget.
Will the state of Illinois and the city of Chicago ever find a solution to their budget woes?
Ron Baiman, Ph.D., assistant professor of Economics in the Graduate Business Administration Department at Benedictine and member of the Chicago Political Economy Group (CPEG), thinks so.
But climbing out of a catastrophic financial hole will take a progressive step, requiring traders on the Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Stock Exchange and Chicago Board Options Exchange to chip in.
Baiman and a group of other Chicago economists are proposing the state and city impose a financial transaction tax on the trades of futures and derivatives contracts — a move he says could net billions in revenue for Illinois.
Baiman published the idea for the tax in a chapter of a recent crowd-funded book, “Chicago is Not Broke. Funding the City We Deserve,” and has presented it before lawmakers in the General Assembly.
Two bills have been proposed supporting a version of the tax, and Baiman and other members of the CPEG are working on a revision of one of the bills — HB 106 — to submit before the upcoming November legislative session.
Also known as the “LaSalle Street Tax,” it would require the Chicago exchanges to collect fees from traders in much the same way Illinois businesses collect sales taxes on consumer goods.
“We’re proposing to apply a very small excise fee on some very large bets,” Baiman said.
The proposed fees on buyers and sellers ($1 on agricultural contracts and $2 on other financial contracts) would not significantly impact traders who are hedging risks or speculating on individual contracts that cost an average of $74,000 (per agriculture contract) and $377,000 (per financial contract), according to Baiman.
“The LaSalle Street Tax would be roughly 5,000 times lower than the 3.2 percent sales tax paid by working class gamblers in Illinois casinos and 9,766 times lower than the 6.25 percent state sales tax Illinoisans pay on consumer goods,” he said.
The proposal could also impact the rate of transactions that take place on the exchanges, primarily reducing the amount of automated high-frequency trading (HFT).
HFT uses high-powered computers to analyze and profit from pricing differences over millions of trades in nanoseconds. It is a practice some economists have cited for hurting the economy, destabilizing financial markets and widening income inequality, and has grown so pervasive that by some estimates represents 50 percent of all trading.
“Though the tax might result in some loss of trading volume and thus revenue for the exchanges, it would reduce ‘rigged’ trading and benefit non-speculative, economically useful traders and overall trading integrity on the Chicago exchanges,” Baiman said. “The financial sector and especially derivative trading has become overly large and destructive to the broader economy, as is evident from the excessive interlinking dependencies of large financial institutions that led to the 2008 financial crash and taxpayer bailout.”
If approved, the LaSalle Street Tax could generate up to $12.6 billion for the state annually. Depending on the per capita funding formula used, Chicago could see $2.5 billion.
“The state’s total general funds budget in 2013 was about $30.3 billion, so the LaSalle Street Tax could be a very large source of revenue,” Baiman said.
This type of a tax is not a new idea, however.
Financial markets in the United Kingdom, Switzerland, Hong Kong, Brazil, France, Singapore and Taiwan all impose a similar tax — in most cases at a higher rate than HB 106, according to Baiman.
“These are all very large markets that have not been hurt by the tax, and the exchanges have not moved away,” Baiman said. “All polls suggest that the LaSalle Street Tax is a very popular idea.”
Benedictine University is located in Lisle, Illinois, just 25 miles west of Chicago, and has a branch campus in Mesa, Arizona. Founded as a Catholic university in 1887, Benedictine enrolls more than 5,000 students in undergraduate and graduate programs. Forbes magazine named Benedictine among "America's Top Colleges" for the eighth consecutive year in 2018. Accredited by the Higher Learning Commission (hlcommission.org). For more information, contact (630) 829-6300, email@example.com or visit ben.edu.