WASHINGTON — A report released by the chair of the Senate Budget Committee argues that tax reform should raise revenue by cutting tax expenditures that mostly benefit the wealthy.

This take on tax reform by Sen. Patty Murray, D-Wash., could be a bad sign for the municipal bond market, since the exclusion on muni interest is an expenditure that is often viewed as disproportionately benefiting the richest Americans.

The online report, "The Opportunity Outlook: A Path for Tackling All Our Deficits Responsibly," lays out principles for addressing long-term deficit and debt challenges.

Tax reform needs to prioritize raising revenue from wealthy individuals and corporations in order to address the United States' long-term deficit problem and make investments that will spur economic growth, the report said. Congress shouldn't wait until it pursues comprehensive tax reform to start closing loopholes in order to invest in areas such as infrastructure and education, it said.

"The need for new revenue raised in a way that protects the middle class is clear," the report said. "The combination of poorly targeted tax expenditures, egregious tax loopholes, and a large and growing tax gap has resulted in a tax code that heavily favors wealthy individuals and multinational corporations at the expense of the vast majority of families and small business owners."

The Senate Democrats' fiscal 2014 budget called for tax reform that raises $975 billion over ten years by eliminating loopholes and cutting spending in the tax code that benefit the wealthiest individuals and largest corporations. That budget was not enacted, but its approach to tax reform "should continue to guide our work to make our tax system fairer and more efficient and to tackle our long-term budget challenges," the report said.

The budget plan left it up to the Senate Finance Committee to determine exactly how the revenue would be raised, but suggested two approaches that could be taken. One would be an across-the-board limit on expenditures claimed by high-income taxpayers, which could take a form similar to that of President Obama's proposed 28% cap on the value of the muni exemption and other tax preferences. The other approach would be to change the structure of certain tax expenditures.

Tax expenditures are projected to cost the federal government $1.4 trillion in fiscal 2014, which is more than the government is expected to spend on Social Security, Medicare, Medicaid and national defense, according to Congressional Budget Office data cited in Murray's report. And most tax expenditures by design "deliver outsized benefits to the wealthiest Americans," the report said.

The report noted that many House Republicans agree with their Democratic colleagues that the tax code contains loopholes that benefit special interests. But it also criticized House Republicans because their priority is to use the revenue raised from tax reform to finance reductions in tax rates.

Under the tax-reform principles in the fiscal 2015 House Budget, the revenue raised from pairing back tax preferences would go to "paying for arbitrarily selected, and unrealistically low, tax rate reductions — the benefits of which are so skewed to the wealthiest Americans that it would be impossible not to deliver net tax cuts to millionaires and impose net tax increases on middle class families with children — while doing nothing to address our long-term budget challenges," the report said.

The draft tax-reform legislation that House Ways and Means Committee Chairman Dave Camp, R-Mich., released in February would raise revenue to finance rate reductions in a way that would actually increase budget deficits and lower taxes for the wealthy, according to the report.

Naomi Jagoda is a reporter for The Bond Buyer based in Washington who covers tax issues and economic indicators.