WASHINGTON — Municipal market participants are relieved, if only for now, that Congress did not include a 28% cap on tax-exemption in the last-minute fiscal cliff deal it narrowly passed to avoid most of the scheduled tax hikes and spending cuts.

“We dodged a bullet,” said Matt Fabian, managing director at Municipal Market Advisors. “The time crunch prevented a larger deal that would have impacted the market.”

The fiscal cliff deal, brokered by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ky., and finalized in the early hours of New Years Day, permanently indexed the alternative minimum tax for inflation so that nearly 30 million individuals won’t be subject to the law, originally intended for wealthy Americans.

“We are pleased that Congress has finally and permanently addressed the long-standing issue of the AMT patch,” said Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association. “The expiration of the previous patch threatened to significantly raise borrowing costs for AMT bond issuers.”

The package also allocated $400 million for qualified zone academy bonds and included a two-month delay on the automatic, across-the-board federal spending cuts known as sequestration.

Other details of the fiscal cliff package relevant to the muni market include: increase the arbitrage rebate exception for qualified school construction bonds to $15 million from $10 million on a permanent basis; allow tax-exempt bond private activity bonds to be issued for qualified education facilities in states with annual volume caps that are the greater of $10 per resident or $5 million; extend the deduction for state and local sales taxes by one year; extend New York Liberty Zone bonds by one year.

The Joint Committee on Taxation estimated the total price tag of the bill will be $3.9 trillion over 10 years.

However, Fabian and other market observers noted that although munis were unharmed, it’s only a matter of time before the market starts to feel the heat again.

“The president clearly has a priority of rolling back the value of tax expenditures for upper income earners,” Fabian said. “Although it didn’t happen this time, in future tax reform discussions the pressure is not off the federal government. The budget balancing that needs to be done can’t be done only through spending.”

There are a trifecta of issues looming that the 113th Congress and President Obama will have to tackle in the coming months including raising the federal government’s debt ceiling, addressing the sequester and passing a budget resolution to keep the government funded. Comprehensive tax reform is likely to be addressed as well.

“If muni bonds and other things were on the menu, they have picked their first course, we still have the second and third course to go,” said a tax lobbyist. “So we are still on the table. This is by no means over.”

While the fiscal cliff deal provided state and local groups temporary relief, they will continue to lobby Congress and the White House about the importance of tax exemption as well as shifting the burden to local governments.

“We view this as Round 1 and are well aware that a full debate on tax reform could revisit public policy arguments on municipal bonds,” said Marc Jahr, co-chair of the Municipal Bonds for America, a coalition issuers, dealers and brokers. “The focus should not be on revenue but on the shared responsibility of federal, state and local governments to insure that vital public infrastructure continues to be financed by the most cost-effective means possible.”

Lars Etzkorn, program director for the National League of Cities, said there is a continuing threat to tax exemption and state and local groups need to remain vigilant.

“What we learned in the discussions that just happened, is that they were not highly transparent,” Etzkorn said. “Once the discussions are underway, it’s almost too late. We need to get the information to the decision-makers before they get to the conference room.”

Scott Pattison, executive director of the National Association of State Budget Officers agreed and said that while states assume there will be spending cuts that will affect their long-term debt situation, primarily “the concern tends to be the lack of certainty and unpredictability.”

One tax provision that surprised some muni market participants was the inclusion of the Clinton-era phaseout of itemized deductions known as “Pease” and the personal exemption phaseout (PEP) for individuals earning more than $250,000 and couples earning more than $300,000.

Chuck Samuels, lawyer-member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, said the muni market temporarily avoided a 28% cap on the value of tax exemption due to the alternative Pease and PEP provisions.