CORRECTED-Congressional Republican leader reassures muni bond issuers

Thu Mar 21, 2013 3:14pm EDT

(Corrects error in 7th paragraph. Republican Rep. Dave Camp does not support capping deductions generally. Error also appeared in Feb. 27 story.)

By Lisa Lambert

WASHINGTON, March 20 (Reuters) - One of the most powerful members of the U.S. Congress - House Majority Leader Eric Cantor - signaled his support on Wednesday for maintaining the tax exemption of interest paid by municipal bonds, offering reassurance to the state and local governments that use the debt to finance infrastructure and other projects.

"The message was received at least in my office about the importance of that benefit," Cantor, who as the second most powerful Republican in the House has been key in most fiscal and tax debates in Congress, told a meeting of the National Association of State Treasurers.

"Lord knows we can't be pulling back on that right now given the current state of our infrastructure," added Cantor, who is from Virginia.

For more than two years, President Barack Obama has suggested limiting the exemption to increase federal tax revenues.

The idea gained traction at the end of 2012, when the "fiscal cliff" crisis sent the U.S. government scrambling to bring in money without raising taxes. Some political leaders have broached doing away with it altogether.

State and local leaders say capping or eliminating the exemption will cost them billions of dollars at a time when their revenues are only just now recovering from 2007-09 recession.

The chairman of the committee drafting a reform plan for the federal tax system, fellow Republican Dave Camp, has said he does not support the approach of capping deductions generally.

Investors are willing to accept less in interest payments from municipal bonds because of the exemption. That in turn keeps borrowing costs low for the issuers in the $3.7 trillion market using the bonds to finance infrastructure, schools and hospitals.

Cantor added a note of caution, saying he had recently met with members of a philanthropic organization lobbying Congress to preserve the deduction people take for donations to charities. The municipal bond tax break has "stiff competition," he said.

"You're up against the charitable deduction," he told the treasurers, who were visiting Capitol Hilln to press for the exemption. "The realtors are in town at some point. You're up against the realtors and the mortgage deduction."

In fiscal year 2011, the U.S. government missed out on collecting $30 billion in revenues because of the exemption, according to a Congressional Budget Office report. (Reporting by Lisa Lambert; Editing by Leslie Gevirtz)