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New York Bondholders Protected From Cuomo Tax Shift, Fitch Says

  • State must cover any shortfall for $35 bln of income-tax debt
  • Governor proposed a payroll tax to get around federal limits
NY Gov. Cuomo Announces Tax 'Fairness Fix'

New York has sold $35 billion of bonds backed by the personal-income tax, a levy that Governor Andrew Cuomo wants to largely do away with to protect residents from being hit by new federal limits on state and local tax deductions. 

But even if he succeeds in replacing the tax on wage earners with a payroll tax on employers, there’s little risk that investors won’t be repaid, Douglas Offerman, a senior director at Fitch Ratings, said in an interview. That’s because a provision in the bond contract requires the comptroller to use general-fund revenue to pay the debt if there’s a shortfall.

“The provision in the PIT (personal income tax) legal documents are very strong," Offerman said. “It’s hard for me to imagine that the state would consider a change in the source of much of its operating revenue without thinking about the impact on PIT bondholders."

Cuomo, a Democrat, has accused Republicans in Washington of waging “economic civil war" on New York and other Democrat-led states by capping state and local tax deductions at $10,000 to help cover the cost of lowering corporate taxes. The federal change could push residents and businesses out of the state, he said. 

Shifting to a employer-side payroll tax that will remain deductible could save New Yorkers billions of dollars, according to the governor.

New York’s personal-income tax generated $47.6 billion in revenue in the fiscal year that ended in March, with $37.5 billion of it drawn from employee wages. New York law requires the state to set aside 25 percent of its personal-income tax receipts or $6 billion -- whichever is greater -- to pay debt service. 

Debt service on New York’s personal-income tax bonds is about $3 billion in the current fiscal year. Fitch rates the bonds AA+, its second-highest investment grade rating, the same as the state’s general-obligation bonds.

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