UPDATE: CME-CBOE Tax Relief Won't Start Until Mid-2012

UPDATE: CME-CBOE Tax Relief Won't Start Until Mid-2012 - Lawmaker

Illinois legislative leaders put the final touches Sunday on a scaled-back plan for tax relief that they still hope will be sufficient to keep derivatives exchange CME Group Inc. (CME) in Illinois, where it has had its headquarters for 163 years.

CME and options exchange CBOE Holdings Inc. (CBOE) would be taxed on 27.54% of all electronic trades, which account for the vast majority of the business performed at the exchanges, based on the final draft of the legislation.

However, tax breaks won't kick in until the start of the next fiscal year, which begins July 1, 2012.

Initially, the exchanges sought to have tax relief take effect for the current fiscal year.

The delay represents "significant concessions" by the exchanges, which enable the cash-starved state to pay its bills this year, said Democratic Representative John Bradley, chairman of the House Revenue and Finance Committee.

Currently, the exchanges pay taxes on 100% of the electronic transactions. State officials came up with the 27.54% figure, using U.S. census data to estimate the proportion of the trades performed in Illinois.

Exchanges are able to attract global market participants because of their electronic platforms.

CME and CBOE protested the state legislature's action in January to raise the corporate tax rate to 7% from 4.8%, an increase costing CME an extra $50 million per year, according to CME Chairman Terry Duffy.

Duffy said it was "not acceptable" that CME accounts for 6% of all corporate taxes paid to the Illinois government, and that the exchange's board of directors was mulling over "very, very lucrative" offers to move its headquarters to other states.

All that would remain in Illinois, according to Duffy, would be the trading floors at the Chicago Board of Trade, which account for less than 5% of CME's business.

CME and CBOE representatives declined to comment Sunday.

The bill allows competing exchanges to opt out of the new taxing method, after an executive of IntercontinentalExchange Inc. (ICE) said the change might raise costs for the Atlanta-based exchange.

ICE earns a "significant allocation of our income" from Illinois, Martin Hunter, an ICE vice president told the state House committee on Nov. 18.

Facing criticism for aiding profitable exchanges, lawmakers and Democratic Governor Pat Quinn attempted to make the measure politically palatable by including incentives to keep Sears Holdings Corp. (SHLD) in Illinois, extend research and development tax credits for all state businesses, and provide earned income tax credits and personal exemptions for workers.

The tax package presented to lawmakers this week will cost the state about $250 million, slashing about $630 million from the earlier version of the bill.

For example, the measure provides $55 million in earned income tax credits for state workers, down from $290 million as proposed by the Governor, said Bradley.

"People make compromises, and that's what we're seeing here today," he added.

The ranking Republican on the committee, David Harris, is backing the revised tax bill, according to Bradley.

Bradley hopes to have the bill approved by both the state House and Senate, and signed by the Governor by the end of this week.

-By Howard Packowitz, Dow Jones Newswires; 312-750-4132; howard.packowitz@dowjones.com

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