"Limiting the amount of tax-exempt interest that can be deducted would likely affect demand and therefore increase debt- issuance costs for all governments who need to access the bond market," said Susan Gaffney, a lobbyist in Washington for the group.
Victoria Rostow, who follows government affairs for the National Association of Bond Lawyers in Washington, said the inclusion of the exemption with other targeted tax breaks was a surprise.
"It came out of the blue," she said. "The budget pressures on state and local government provide a very compelling reason to keep it."