PhotoLost in the din of the talking heads is a key element of President Obama's plan to pay for his proposed $447 billion job-creation package: he wants to curb the amount of interest "high-income" taxpayers can deduct for municipal bonds, and limit deductions for charitable contributions.

Income from municipal bonds would be included in a proposed cap on deductions, possibly curbing demand for state and local government securities, one of the primary ways governments finance building infrastructure.

“We’ve got to decide what our priorities are,” Obama said as he released the legislative text yesterday. “Do we keep tax loopholes for oil companies -- or do we put teachers back to work? Should we keep tax breaks for millionaires and billionaires -- or should we invest in education and technology and infrastructure, all the things that are going to help us out-innovate and out-educate and out-build other countries in the future?”

Just a few days ago, state and local governments sent a letter to the 12 members of the so-called "Super Committee" that has been charged with balancing spending and revenue.

“In a world in which there are likely reductions to domestic discretionary and perhaps even mandatory and entitlement spending, it is critical that this tool be preserved in order for us to protect our investments,” said Michael Bird, federal affairs counsel for the National Conference of State Legislatures.

“NCSL truly understands that if you are going to do serious deficit reduction and debt-management control, we are going to have to make a contribution to that reduction, and since federal funding will therefore diminish potentially in the future, the retention of tax-exempt financing becomes all that more important,” Bird said.

The money Obama is trying to raise would be used to offset part of the cost of cutting the payroll tax for employers and some lower- and middle-income taxpayers, along with infrastructure programs. Republicans say they may be willing to support some of the tax cuts but are skeptical about the spending and tax increase proposals.

Taxing the "rich"

The biggest chunk of revenue in the jobs package, about $400 billion, would come from capping at 28 percent the itemized deductions and certain exclusions for individuals earning more than $200,000 a year and married couples earning more than $250,000.

That's not going down well with charities, who might be hit hard by limits on itemized deductions.

"This is the very last moment in time that you would think it would be productive to limit the funding of the charitable sector,” said Andrew Schulz, vice president of the Council on Foundations in an interview with Investment News.

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