New York State Tax Overhaul Is Favorable For NY Muni Bond Closed-End Funds

Includes: MNE, NRK
by: George Spritzer, CFA

New York Governor Andrew Cuomo and legislative leaders have reached agreement on a state tax reform plan that will reduce taxes for most New Yorkers, but will retain a higher “millionaires” tax bracket for single filers earning over $1 million and households earning over $2 million.

Until last week, the millionaire’s tax reinstatement was considered officially dead by both Cuomo and Senate Majority Leader Dean Skelos. But Cuomo recently made the case that the world and national economies were unstable, while weak revenues created an unexpected $350 million deficit this year and another projected deficit for 2012-13.

The income tax rate for the top bracket would increase from 6.85% to 8.82% on January 1. New York City residents in the top bracket will pay a combined 12.5% in the top tax bracket.

I believe that New York state municipal bond closed-end funds will benefit from the new tax law. There are several reasons why a New York state or city resident should consider buying these:

  • Municipal bonds are exempt from Federal, state and city income taxes for local residents. If a New York City resident purchases any New York tax free bond, that income is exempt from Federal, New York State and New York City income taxes. This is called “triple tax free”. Note that if that same NYC resident bought a Texas municipal bond, the income is exempt from Federal taxes, but he would still have to pay New York State and New York City income tax.
  • Some investors live in subsidized or rent stabilized housing for people with low to moderate incomes. They may need to keep their Federal and state taxable income below a certain level or else they could lose their low cost housing arrangement. New York City has several housing subsidy programs and many residents live in subsidized housing of one form or another.
  • An investor may be reluctant to purchase a national municipal bond fund because they want to avoid investing in some states entirely. They can construct a customized national fund by selecting only the single-state funds they want to own.

Back in January, I wrote a report on the Nuveen New York Select Quality Municipal Fund (NVN). The fund’s NAV has performed quite well since then, and the discount has dropped from 5% down to 1% which has added to the total return.

I think NVN is still a good holding, but it is not as attractive now at a 1% discount as it was earlier in the year. Of course, if you are holding NVN in a taxable account, you would want to keep it for at least a year before selling in order to qualify for long term capital gain treatment.

Municipal bond closed-end funds have been on a tear lately and may be due for a brief pullback. Here are two New York State municipal bond Closed-end funds that look fairly attractive now to add to a watch list:

Nuveen New York Investment Quality Municipal Fund (NQN)

  • Market Cap: $261 million
  • Discount to NAV= -2.5%
  • Distribution Yield: 5.56%
  • Leverage: 38%
  • Average Trading Volume: 34,000
  • Baseline Expense Ratio: 1.43%
  • % AMT= 4.32%

Blackrock Muni New York Intermediate Duration Fund (NYSE:MNE)

  • Market Cap: $59 million
  • Discount to NAV= -5.8%
  • Distribution Yield: 5.25%
  • Leverage: 31.5%
  • Average Trading Volume: 10,000
  • Baseline Expense Ratio: 1.22%
  • % AMT= 17.50%

Disclosure: I am long NVN.