Calls for the elimination of tax-exempt interest could seriously disrupt the municipal bond market, while incremental action to rein in the tax-exempt interest cost to the federal government is more likely than an all-out end to munis, market observers with the Bond Dealers of America said Monday.

Part of the discussion over deficit reduction and tax reform in recent months has included talk of replacing tax-exempt interest on new state and local government bonds with a federal tax credit or subsidy. Advocates have said the move would save the federal government money on the current municipal market, which they criticize as an inefficient way for Washington to subsidize state and local projects.

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