Just back from my local indy shop and they also suggested a straight pipe to replace the CC but keep the center and back mufflers intact. Will there be an issue with the Oxygen sensor? Or any annoying lights popping up on the dash?

My car is exempt from emissions testing in Illinois so he said it was perfectly legal to install the pipe and remove the CC.

Its an emissions device, its NOT legal to remove it. Don't let that stop you though, I'm just pointing out the facts.

Your cat is not like modern cars; its a passive device that the engine, computer and you have no direct control over it. Being a W124 chassis your engine is still controlled mechanically by you and it does not have a check engine light or computer. Only 1996+ E300 models have an engine computer.

Check

What type of MPG increase could I expect?