A new report by a budget group might bring a sigh of relief to muni market participants as it outlines alternatives to raising revenue that don’t include curtailing tax-exempt bond interest and other tax expenditures.

The Committee for a Responsible Federal Budget’s report, “Beyond Tax Expenditures,” which was published Wednesday, identifies “non-tax expenditures base provisions” within the income tax structure that could provide a substantial resource for deficit reduction and tax reform by broadening the existing income tax base.

The authors — Marc Goldwein, Jessica Stone, and Adam Rosenberg — define NTEBPs as “provisions in the tax code that narrow the tax base and allow for a reduced tax burden but are not classified as tax expenditures and not eliminated under a blank slate exercise because they do not represent a clear divergence from a ‘clean’ tax code.”

NTEBPs include deductions for ordinary business expenses, exemptions based on family size, and other provisions. Recent tax reform discussions have focused on tax expenditure reductions, including capping tax exemption for municipal bonds or completely eliminating it.

Senate Finance Committee chairman Max Baucus, D-Mont., and Sen. Orrin Hatch, R-Utah., ranking minority member, proposed a plan earlier this month that would use a “blank-slate” approach where tax expenditures could be added back, but lawmakers would have to justify and offset any restorations.

All tax deductions, expenditures, exclusions, credits and other tax preferences will cost the federal government approximately $1.3 trillion in forgone revenue in 2013, with roughly two-thirds of that coming from the top 20% of earners. according to the report

“Many tax expenditures distort economic activity, not only by requiring larger tax rates or deficits to finance them but also by driving consumption and investment decisions toward what is tax preferred and away from what is not,” the report said.

The authors note that while tax expenditures reductions should be a central component for a comprehensive overhaul of the tax code, there are significant political, economic and administrative challenges to eliminating them.

“Policymakers would be wise to look beyond tax expenditures for revenue — a reality Baucus and Hatch appear to recognize...,” the report said.

Identifying NTEBPs will require lawmakers to carefully review the tax code, literally going through it line by line. The report highlights several provisions that are ripe for change, but said more research will be necessary.

The report identifies 13 NTEBPs that lawmakers could consider reducing, repealing or modifying. They include: moving expense deduction, employee expense deductions, gambling loss deduction, business use of home, deferral of capital gains income, standard deduction, personal and dependent exemptions, business NTEBPs, deductibility of employee training costs, business state and local tax deductions, deductibility of interest expenses, deductibility of meals and entertainment expenses, and acquired intangible assets.

Combined, these NTEBPs would total $347.5 billion in annual forgone revenue, the report said.

“While recent focus has been largely on so-called tax expenditures, NTEBPs are an important part of the code that deserve careful review and far more attention than they have received to date,” the report concluded.

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