While the battle over the debt ceiling may temporarily be over with the dramatic House and Senate votes on August 1 and 2, the next chapter will now open with a congressional committee being tasked with finding another $1.5 trillion in deficit reduction. While some of the progress may be made through additional spending cuts, reform of the federal tax code will also draw attention. One area that may be in the cross-hairs is tax-exempt municipal bonds. Though the ability of state and local governments to issue tax-free debt has generally been considered a privilege protected by the principles of federalism and state sovereignty embodied in the 10th Amendment of the U.S. Constitution, a number of legislative proposals now being introduced include the termination of traditional tax exemption for new municipal bonds. Alternatives include the replacement of tax-exempt bonds with tax-credit bonds, which have an abysmal track record due to the absence of a market for such a structure.