By Hilary Russ
Oct 10 (Reuters) - The national trade group representingU.S. bond dealers announced on Wednesday the formation of acoalition to defend the tax-exempt status of municipal bonds, akey trait of the $3.7 trillion market.
Tax exemption for munis is under threat as Congressconsiders narrowing the U.S. budget deficit with spending cutsand new sources of revenue for the federal government.
Ending or limiting tax exemptions for munis could causeinvestors to pull out of the market and raise borrowing costsfor states, cities and other issuers, according to MunicipalBonds for America, the new group.
"Policy makers should not try to fix what isn't broken,"said the group's co-chair Ken Williams, municipal bonds managerat Stifel Nicolaus, in a statement. "A tax on tax-exempt bondsultimately shifts more burdens to local governments."
Organized by the Bond Dealers of America, the coalitioncomprises about 25 muni bond dealers from middle-marketsecurities firms. It also includes a local Tennessee official,the executive director of the National Association of LocalHousing Finance Agencies and others.
The group will conduct research and lobby Congress. Itexpects to add issuers, academics, local elected officials,analysts and investors to its ranks in the coming weeks.
The Revenue Act of 1913 first codified that muni bondearnings were exempt from federal income taxes. Tax reform in1986 restricted the exemption to public purpose bonds and mademany bonds issued for private activities subject to thealternative minimum tax.
U.S. President Barack Obama included tax-exempt municipalbond interest in legislation in September 2011 and again in hisproposed 2013 budget in February.
Obama proposed limiting the value of the tax exemption to 28percent from the current 35 percent for high-income taxpayers.
Advisers to Republican Presidential candidate Mitt Romneyhave indicated that tax-free munis are on the table in terms oftax reform, according to a previous report by the Bond Dealersof America.
Observers don't expect significant movement on the issueuntil after the end of the lame-duck session following thepresidential election.
(Additional reporting by Lisa Lambert; Editing by JamesDalgleish)
Keywords: MUNICIPALS TAXEXEMPTION/