Soon the Illinois state legislature will meet in special session to consider the Chicago machine’s latest favor: legislation designed to deliver tax relief to three of the state’s largest companies. These tax breaks for the lucky few come just 10 months after the Illinois legislature approved what has been described as the largest tax increase in the state’s history. It’s no coincidence that both have been supported by Gov. Pat Quinn and other top leaders of the state’s Democratic Party.

In so doing, Chicago is giving America a window into the logic of crony capitalism: Raise taxes on everyone—and then cut side deals with those big enough to lobby for special relief.

The legislature is considering this limited tax relief because three corporate mainstays of greater Chicago have threatened to leave without it. One is the CME Group, operator of the Chicago Mercantile Exchange, the world’s largest futures exchange by volume. Another is the Chicago Board Options Exchange (CBOE), the world’s largest options exchange. The last is Sears, one of America’s oldest and most famous retailing giants.

Associated PressIllinois Gov. Pat Quinn

Earlier this month, CME chairman Terrence Duffy told Illinois lawmakers that his company is entertaining “very, very lucrative offers” from other states. Meanwhile, his counterpart at the CBOE, Bill Brodsky, says his exchange needs relief from a tax code that is “virtually punitive.” Sears has chimed in too, with its general counsel reporting that it has a $400 million offer from a nearby state to relocate there.

To be fair, these companies have a case when they complain that Illinois is making them less competitive. Take CME. Because its world-wide sales are taxed in Illinois, CME accounts for almost 6% of all state corporate taxes. On top of this, Mr. Duffy says that the “temporary” corporate tax increase passed in January is now costing his company an extra $50 million a year.

CME and the other beneficiaries of this special tax bill would have a far better case, however, if instead of pushing for special treatment for themselves, they used their clout to argue for a more market-friendly environment overall. After all, if the state’s tax treatment is making it hard for Sears and CME, the family restaurant or mom-and-pop shop down the corner is probably feeling the pinch too.

Alas, equal treatment is not the Chicago way. Maybe that’s why we heard little from corporate Chicago when Mr. Quinn was campaigning for his tax hikes. To the contrary, back in June the Chicago News Cooperative reported that CME donated $50,000 to Mr. Quinn in the general election and $40,000 in the primary, $200,000 to Rahm Emanuel (a former CME board member) during his run for mayor of Chicago, and $150,000 to the man who really runs Illinois, House Speaker Mike Madigan.

Perhaps you can’t blame these companies for going with the only game in town. For notwithstanding an exodus of job-creators and a public debt that has the state in hock up to its eyeballs, the Illinois GOP has not been able to come up with an alternative message. On this measure, for example, Republicans are flummoxed, limiting themselves largely to quibbling around the margins of general tax relief.

That’s unfortunate for Illinois, because there’s a story waiting to be told. According to a soon-to-be released study of IRS tax filings from the free-market Illinois Policy Institute, between 1995 and 2008 Illinois lost 345,891 tax filers. All in all, that works out to a $188 billion loss in net income. That loss is remarkable, especially given that one in four of these taxpayers moved to a bordering state.

This is the fruit of Chicago politics. That much should be clear from the governor’s election in 2010, when Mr. Quinn won office despite losing 98 of the state’s 102 counties—all but Chicago’s Cook County and three others in the southwest. These days the governor is highly unpopular for his tax hike, so Democrats such as Mayor Emanuel have become the face of the special relief bill. The constant is that the machine remains intact, here taxing all, there doling out favors to a well-connected few.

The rest of America would do well to think of it as a public service. Next door in Indiana, Gov. Mitch Daniels is showing what you can do when your government gets control of spending and allows its businesses to blossom. In sharp contrast, by settling for Chicago rules Illinois provides us with the perfect bad example, a vivid illustration of how high taxes and crony capitalism go hand-in-hand.

“Our Chicago machine has come up with a deal so rotten it’s uniting Occupy Wall Street and the Tea Party,” says the Illinois Policy Institute’s Collin Hitt. “If Illinois Republicans don’t use this opportunity to find their voice on tax cuts, they never will.”

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