briefing – financial transaction tax

FinancialTransactionTax

FinancialTransactionTax:TheCitydoesnotimposeataxonfinancialtransactions,suchasstockorderivativestrades,swaps,oroptionscontracts.

BackgroundChicagoishometo22%oftheworld’sderivativetradingvolume,1withChicago-basedexchangesgenerating4.7billioninannualglobalderivativestradingvolumein2014.TheChicagoMercantileExchange(CME)postedthelargestannualvolumeofallglobalderivativesexchangesin2014.TheChicagoBoardOptionsExchange(CBOE)isthelargestoptionsexchangeintheU.S.,andtheChicago-basedOptionsClearingCorporationclearsallU.S.optionscontracts–4.6billionin2014.WorldBusinessChicagocounted47,614jobsinthefinancialtradingindustryin2014,witheverytradingjobcontributinganestimated2.2additionaljobsinotherindustriesacrosstheChicagoeconomy.RevenueImpactTherevenuegeneratedbyafinancialtransactiontaxwouldvarysignificantlybasedonthetypeoftransactionstaxed,thebasisforthetax(e.g.apercontracttax,apercentageoftheunderlying/notionalvalueofthecontract,etc.),andthetaxrate.Anumberofestimateshavebeensubmittedbyvariousgroupsandmediaoutletsinrecentyears.However,anyestimatemustaccountforthemobilityofthisindustry.AsofJuly2015,whenCMEshutdownalmostalloftheiropenoutcryfuturespits,thecompanystatedthat88percentoftheirtradesoccurredelectronically;and98percentofCBOE’stradesoccurredelectronicallythroughserverslocatedinNewJersey.Thisnotonlypresentsalegalissue,asfurtherdescribedbelow,butdemonstrateshoweasyitwouldbeforthesecompaniestore-locateoutsideofChicagoorfortheircustomerstousecompetitorsoutsideofChicago.LegalAuthorityTheCity'shomeruleauthoritydoesnotincludetheauthoritytoimposeataxonfinancialtransactions.Anyattempttoimposesuchataxwouldalmostcertainlybeheldtobeanunauthorizedoccupationtax.Further,Statestatutespecificallyprovidesthat“[n]ounitoflocalgovernmentshalllevyanytaxonstock,commodityoroptionstransactions.”35ILCS820/1.InadditiontoState lawrestrictions, federalstatuteprohibitsstateand localgovernments fromtaxingcertain securities tradesunless there isa connection to the stateor localityother than themere factthatthetradesareroutedthroughanin-stateclearinghouseortransferagent.15U.S.C§78bb(d).Thisstatuteappliestostocksbutnottocommodities.Ataxoncommoditiestradeswouldnotbeprohibitedby the statute, but it would still require a sufficient “nexus” (or connection) to Chicago (note thatderivativesmaybeeitherstockorcommodity-based).Ineithercase,atradeinvolvingaChicagobuyerorsellerorsignificantactivityonthepartofaChicagobrokermighthavesufficientnexustobetaxed;however,atradeinvolvingonlyaChicagoclearinghouseorcomputerservermightnot.

1Derivativesarefinancialproductsbasedontheexpectedperformanceofanunderlyingasset.Forinstance,afuturescontractincornisaderivative,sinceitisboughtandsoldbasedonthemarket’sexpectationofthefuturepriceofcorn.

OtherCitiesNootherU.S.cityhasafinancialtransactiontax.ThefederalgovernmentimposesaminorfeeonfinancialtransactionstofundtheSecuritiesandExchangeCommission.In1907,NewYorkimposedataxonallsalesortransfersofsharesorstockintheState.However,in1966thetaxwasamendedtoaddressthelossofbusinesstostockmarketsinstateswithoutlocaltransfertaxes–cappingliabilityunderthetaxforanyin-statesaleortransfer.ThisamendmentwasheldbytheU.S.SupremeCourttoviolatetheCommerceClauseoftheU.S.Constitutionbyprovidingadirectcommercialadvantagetolocalbusinesses.Followingthatdecision,theStatebegantophaseoutthetaxbyprovidingrebatestothosesubjecttothetax.By1981,thelevelofthisrebatereached100%ofthetaxamount,effectivelyrepealingthetax.