WASHINGTON — The possibility of a budget compromise between President Obama and Congress to raise income tax rates is more likely than one that would include capping the value of tax exemption for the wealthy, Morgan Stanley Smith Barney told investors Tuesday.

“Although the prospect of ‘capping’ the value of the municipal tax exemption at the level of a 28% tax bracket investor remains, it is by now a familiar concept in the marketplace and one that has gained little traction since its introduction by the Obama administration in late 2011,” John Dillon, MSSB managing director, wrote in note to investors. “It is quite possible that this risk may shadow the municipal market well into 2013.”

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