Obama tax plan: Democrats push back

NEW YORK (CNNMoney.com) -- One of the most controversial provisions in President Obama's proposed budget might have a short shelf life on Capitol Hill.

To pay for half of his $634 billion health reform fund, Obama has proposed limiting deductions for high-income taxpayers starting in 2011.

Instead of using their top income tax rate to calculate the value of a deduction, single filers making more than $200,000 and joint filers making more than $250,000 wouldn't be allowed to reduce their bill by any more than 28% of a given deduction. That's below what the top two tax rates would be in 2011.

That means the value of some of the most popular deductions -- such as mortgage interest and charitable contributions -- would be reduced for high-income filers.

But the provision, which is likely to be debated at a health care summit the president has set for Thursday, has already met resistance from some leading Senate Democrats including Finance Chairman Max Baucus and committee member Ron Wyden, D-Ore.

At a hearing Wednesday, Baucus told Treasury Secretary Tim Geithner that he questioned the "viability" of the itemized deduction proposal and suggested the administration find another way to help pay for its health reform fund.

"There are other tax provisions that have a lot to do with health care, but that one does not. I'd just urge the administration to dig down deeper to try to find viable savings and concentrate on savings within health care reform," Baucus said.

One main criticism of Obama's proposal is that it would harm charitable giving.

In response, Geithner said the provision would only affect 1.2% of taxpayers and have only "modest effects" on how much people donate.

"The most important thing you can do for overall charitable giving is to get the economy strong," Geithner said.

One expert agrees that giving is closely tied to the fate of the economy.

"If GDP is down, there's going to be a decline in giving," said Daniel Borochoff, president of the American Institute of Philanthropy.

Len Burman, director of the Tax Policy Center, estimates that the provision would reduce annual giving by roughly 2%, or $9 billion, in 2011.

Congressional push-back on the plan to curb deductions could force the administration to find another way to generate the billions it needs to fund its signature health care plan.

Baucus pointed to one possible alternative. He asked Geithner whether the administration would consider generating new revenue by curbing or eliminating the tax break offered to employees when they buy health insurance policies through their companies.

Currently, the portion of their premiums paid by the employer is treated as tax free income to employees, meaning they pay no income tax on that subsidy, nor do they pay Social Security or Medicare tax on it.

The health insurance exclusion is the federal government's single biggest tax expenditure, worth $246 billion in forgone revenue in 2007, according to the Joint Committee on Taxation.

Calls to change the tax exclusion have been made before both because the subsidy does not discourage workers from being more cost-conscious in their health care decisions and because it favors only those who get insurance through an employer, not those who buy policies on their own.

During last year's campaign, Obama said that while he wanted to reform health care, he would not seek to overturn the tax-free subsidy for those who get their insurance from their jobs.

Without committing to Baucus' suggestion in particular, Geithner seemed to indicate that the administration might be willing to reconsider its deduction proposal.

"We recognize there [are] more paths to [paying for health reform] than what we laid out in the budget," he told the Finance Committee. "But we wanted to put it on the table to prove the credibility of our commitment to do this, concrete proposals that would achieve that."