The La Salle Street Tax fairy tale
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Like Tinkerbells with pixie dust, dozens of candidates for alderman keep trying to spread a complete fantasy: a “La Salle Street tax” would solve all or much of Chicago’s massive financial problems.
Don’t believe it. Chicago needs solutions, not fairy tales.
A large financial transaction tax almost certainly would backfire and decimate Chicago’s financial markets, draining rather than growing Chicago’s tax base.
And a more responsibly measured La Salle Street tax would generate only a modest sum for our hard-pressed city and state.
Chicago’s four pension funds — for police, firefighters, municipal workers and laborers — are grossly underfunded and at risk of going under. The funds are begging for a massive infusion of public money, along with reductions in benefits themselves.
The Sun-Times Editorial Board asked mayoral and aldermanic candidates where that cash — that new tax revenue — might come from.
Time and time again, aldermanic candidates in particular have offered up the La Salle Street tax. The proposal du jour calls for a $1 to $2 fee on each futures, futures options and stock index options contract traded on the Chicago Mercantile Exchange and the Chicago Board Options Exchange. Most candidates have offered no evidence to back up the claim — the oh-so tantalizing claim — that the tax would generate between $10 billion and $12 billion for the state, about $2 billion of which would go to Chicago.
In truth, that estimate has no basis in reality. It is wishful thinking promoted by the Chicago Teachers Union, based on work by William Barclay of the Chicago Political Economy Group, whose goal is to promote “economic and social justice.” Barclay, who had a long career in financial services, calculated the $10 billion to $12 billion figure.
Here’s the main problem (besides the fact that such a tax is prohibited by state law and possibly by federal law): Barclay didn’t factor in how this tax might discourage electronic trading in today’s highly mobile world or how it could drive trading out of Chicago all together. Barclay is convinced that the impact would be minimal, and he articulates logical arguments, but few other experts agree with him.
They argue, more convincingly, that a tax of that size would inevitably force a sharp reduction in trading. Chicago’s exchanges also could move shop, figuring it’s cheaper in the long run to relocate than it is to pay a heavy tax.
Even folks who have long pushed for a financial transaction tax on the national level — which makes far more sense to us and most experts, even Barclay — say a $10 to $12 billion estimate is, well, absurd. A national tax might tempt markets to flee the U.S, though as many as 30 countries, including Australia, Switzerland, Hong Kong and India, already have a financial transaction tax. In fact, 11 countries in the European Union are close to imposing one. But if you impose a tax on Chicago only, then New York, Los Angeles — heck, Indiana — are easy places to relocate.
Even Dean Baker, an influential left-leaning economist who has been pushing a federal transaction tax for 20 years, thinks a $1 to $2 Chicago-only tax is a mistake.
“I couldn’t envision that you could do that without massive flight from the exchanges,” he told us. A tax that generated as much as $100 million [for the entire state, not just Chicago] is “probably a safe number,” he said. “At $10 billion, they’d be gone.”
Even We Are One Chicago, a coalition of Chicago labor unions, estimated in a 2014 report on possible city revenue options that a transaction tax would generate only $38 million to $100 million. The $38 million figure is based on a 2011 assessment of a one penny tax by the city inspector general’s office.
The CME Group is strongly opposed to any tax, as is Mayor Rahm Emanuel. The mayor is right to oppose a large tax, although we do urge him to at least give a public airing to the idea of a very small tax. Generating an extra $38 million a year isn’t much against the city’s pension bills — $1.1 billion just for police and firefighters next year — but it’s something.
The continued fixation on a massive La Salle Street tax, however, is a distraction and a waste of time. It does no one good, especially city workers counting on a pension in retirement, to keep going down that rabbit hole.
Advocating for a federal tax or very small Chicago tax might make sense. But if the goal is help dig Chicago out of its financial hole, a La Salle Street tax is a fairy tale.