Top Dems Question Tax Deduction Proposal

President Obama's proposal to limit itemized tax deductions for high earners is running into opposition from key Democrats in Congress who worry that charities and the housing market would be hurt.

Senate Finance Committee Chairman Max Baucus questioned Wednesday whether the proposal was viable, a day after his House counterpart also expressed reservations.

Treasury Secretary Timothy Geithner said tax increases on families making more than $250,000 a year are necessary to make a down payment on health care reform and to limit future budget deficits. But, he said, he was willing to work with lawmakers on proposals they objected to.

"We recognize there are other ways to do this," Geithner told the Finance Committee.

Baucus, a Montana Democrat, said he thought the administration would be flexible on the proposal. "They want health care reform as much as I do," he told reporters.

Geithner and White House budget director Peter Orszag returned to Capitol Hill on Wednesday for a second day of hearings on Obama's $3.6 trillion tax and spending proposal. Both faced tough questions about the tax package.

The White House has launched its battle to push the ambitious budget package through Congress during a week that has seen the economy's continuing erosion - particularly on the stock markets. Wall Street remained on edge with both the Dow Jones industrial average and the Standard & Poor's 500 index registering their lowest finishes in more than a decade.

Geithner and Orszag blame the Bush administration for creating a situation that makes the massive plan necessary, and stress that the new measures need time to work. (Read more on White House's defense of the budget.)

"It's way too soon to start judging success or failure here," White House Budget Director Peter Orszag said on CBS' The Early Show Wednesday. "We inherited a large mess."

Mr. Obama's budget calls for setting aside $634 billion over the next 10 years as a down payment on health care reform. Half the money would come from tax increases on upper-income earners; the other half from cuts to Medicare and Medicaid.

In an effort to keep the president's push for sweeping health care reforms moving forward, the White House was to host some 120 industry experts and lawmakers for a summit on the topic later Thursday.

The budget calls for two tax increases on couples making more than $250,000 and individuals making more than $200,000. Mr. Obama wants to increase the top tax rates from 35 percent to 39.6 percent by allowing a tax cut enacted under President George W. Bush to expire in 2011.

He also wants to limit the deductions those families can claim for charitable donations, mortgage interest and state and local taxes.

Without the new limits, a taxpayer in the proposed 39.6 percent tax bracket could save $396 in taxes from a $1,000 reduction in taxable income. Obama wants to limit deductions to the 28 percent bracket starting in 2011, meaning the same taxpayer would save only $280.

The higher tax rates are a good bet to become law because Obama campaigned on the change and Congress would not have to do anything to enact them. Once the Bush tax cuts expire at the end of 2010, the higher rates would take effect.

But some key Democrats are wary of limiting deductions.

"I don't want to prejudge anything, but it is certainly one that I am having difficulties with," said Sen. Robert Menendez, D-N.J.

On Tuesday, Rep. Charles Rangel, chairman of the tax-writing House Ways and Means Committee, said he, too, had reservations about the proposal.

"I would never want to adversely affect anything that is charitable or good," the New York Democrat said.

Republicans have been even more critical of the proposal, saying it would reduce charitable donations at a time when many charities are struggling.

"There are people with the means to help. Why would you make it harder for them to do it?" said Rep. Thaddeus McCotter, chairman of the Republican Policy Committee, who is from Michigan.

Geithner said the change would merely restore the same deduction limits that were in place when President Ronald Reagan left office.