New York municipalities may see a lapse in tax collections if the state legislature fails to enact extensions on some of their key revenue sources before the end of 2017, according to Fitch Ratings.
The New York state Senate and Assembly adjourned their 2017 session on June 21 without an agreement on legislation that would extend the right for 53 counties to charge sales taxes above the 3% base sales tax rate and New York City to continue its current income tax rate. Fitch analyst Amy Laskey noted in a June 23 report that many counties in the Empire State levy taxes that are 1% or more and some share this revenue with their localities. The bill also would permit continued mayoral control of the New York City public school system.
“We do not believe the legislature's intention was to deprive local governments of a revenue source that for many funds a significant portion of their budgets,” said Laskey. “However, the parts of the bill concerning the schools were highly politicized.”
Laskey said state officials are discussing arrangements to vote on a bill incorporating the tax extensions before the next session starts in early 2018. The tax needs to be renewed biennially by the legislature.
“Fitch expects the extensions to ultimately be extended before they expire,” said Laskey. “But Fitch will take any rating actions it deems appropriate if this expectation is not met.”
Failure to extend the taxes would impact debt service coverage for multiple state-created authorities whose bonds are backed by sales tax revenue such as those of the New York City Transitional Finance Authority, according to Laskey. The TFA’s bonds, which are secured by both sales and income taxes, could see an $8.1 billion loss of tax revenues by the 2021 fiscal year absent an extension, an analysis by the conduit bond issuer showed. Laskey added that the TFA study shows the impact of fiscal 2018 revenues from reducing the income tax rate starting Jan. 1 would number $2.9 billion.
“This has a modest impact on TFA coverage yet would create a gap in the city's fiscal 2018 budget (beginning July 1, 2017) as the income taxes reduced represent 3.4% of budgeted revenues,” said Laskey. “However, for those with fiscal years ending December 31 and taxes expiring on November 30, current year budget adjustments would be needed.”