That does not work without forcing the users to also use the proxy. Any website that uses https instead of http does not leak passwords, unless the device/browser of the user is compromised.
It sounds like a mechanism to make the town dependend on the cartel for internet, and then demand extortion prices for the internet.
Https is explicitly designed against man-in-the-middle attacks. Modern browsers make a bigggg fuss if a man-in-the-middle is attempting some shit. Those attacks do not work.
And if you do manage to make it work, it sure wouldn't be easier than pointing a gun at someone and telling them to pay up for their internet connection.