President's Debt Reduction Plan Threatens Muni Market

President Obama recently delivered a draft of his Plan for Economic Growth and Deficit Reduction (the "Debt Reduction Plan") to Congress. The Debt Reduction Plan provides for a steady reduction of the nation's outstanding debt as a percentage of gross domestic product. If certain targeted ratios are not met in a given fiscal year, however, the Debt Reduction Plan provides for automatic cuts in spending and tax preferences – cuts that could adversely affect the tax exemption with respect to municipal bonds.

Another plan recently introduced by the President in the form of the $447 billion American Jobs Act of 2011 (the "Jobs Act") also contained provisions that threatened the tax exemption on municipal bonds. The U.S. Senate recently defeated the Jobs Act by a vote of 50 to 49 (60 votes were needed for cloture). If adopted, the Jobs Act would have capped the amount of tax-exempt interest, and other related expenditures and deductions, to 28% for all individuals earning