DALLAS -- Moody’s Investors Service lowered its rating on $200 million of Kansas economic development bonds due to cuts in the rate for the state’s income tax, which supports the debt.

Bonds issued by Kansas Development Finance Authority for the state commerce department’s IMPACT program were dropped three-notches to A3, with a negative outlook, from Aa3.

Proceeds from the bonds fund the Investments in Major Projects and Comprehensive Training effort for new or expanding companies. The program is credited by the state with creating or preserving more than 93,000 jobs.

The IMPACT bonds are supported by the state income tax withheld from workers in the program.

“Because IMPACT program bonds are backed by a statutory allocation of revenue from income tax withholding, efforts to eliminate the state income tax without defeasing the debt or substituting a new revenue source will expose bondholders to risks greater than previously anticipated,” Moody’s said in its ratings report.

The 2013 Legislature passed legislation that will lower the tax rate in steps over the next five years.

The top tax rate will drop to 3.9% from the current 4.9% by 2018. If state revenues grow by more than 2% a year, the withholding rate will drop even further.

“So far, the state has not disclosed any offsetting measures it will take to protect bondholders or projections of the expected implications for debt-service coverage through maturity (in 2023),” Moody’s said.

The series of 12 bond issues were put on review by Moody’s for possible downgrade in late March.

Revenues from the income tax are expected to be $1 billion less in fiscal 2015 than would have been collected under the previous rates. The gap grows to $1.47 billion in fiscal 2018.

Individual income tax collections totaled $2.9 billion in fiscal 2012.

The effort by Gov. Sam Brownback and Republican legislative leaders to entirely eliminate the income tax poses risks to the IMPACT bonds, Moody’s said, even though revenues will provide sufficient debt service in the near term.

“More importantly, the enactment of long-range income tax rate reductions with no steps to protect IMPACT bondholders underscores a fundamental credit weakness: that pledged IMPACT revenues are vulnerable to tax law changes,” Moody’s said in the report.

Kansas has an issuer rating of Aa1 from Moody’s, which rates at Aa2 the state’s $1.25 billion of appropriations-supported debt.

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