Congressional Democrats on Friday called for limits on tax deductions as a way to reduce the deficit and also pushed for the Build America Bond program to be reinstated.

Rep. Chris Van Hollen, D-Md., top Democrat on the Budget Committee, said on Friday he wants to “phase out” some “tax preferences” for joint filers who earn more than $500,000 annually.

Limits on tax deductions were first imposed in 1990 to raise revenue. The law reduced most itemized deductions by 3% when annual gross income went above certain levels. The law was changed in 2001 as part of President George W. Bush’s tax cuts. That law gradually reduced the itemized deduction restrictions from 2006 to 2009, and eliminated the restrictions completely for 2010.

Last December, the Bush tax cuts were extended, eliminating all itemized deduction limitations through 2012. President Obama’s fiscal 2012 budget would ­reinstate the itemized deduction limits for couples earning $250,000 or more. His budget proposal requested a 28% cap on the value of itemized deductions.

Renewed deduction limits would affect some state and local revenues. Thirty-six states piggyback off of the federal tax code, and any changes at the federal level to cap itemized deductions means these states “will automatically collect higher taxable income,” said Girard Miller, a senior strategist at PFM Group.

However, Miller said capping the deductions could have negative consequences for state and local governments, specifically if the mortgage deduction is limited, putting additional pressure on the housing market.

Taxpayers who itemize their deductions and invest in municipal bonds are often part of the same, high-income earners group. A January study from the Tax Policy Center said 70.9% of taxpayers in the 33% income tax bracket itemized their deductions in 2010. Almost 90% of tax filers in the 35% bracket itemized. Only about 30% of all taxpayers itemize their returns, the report said.

Taxpayers who earned more than $1 million reported $22 billion in tax-exempt interest in 2008, representing the largest group of all tax filers who held munis, according to a April report from Standish Asset Management.

Separately, Rep. Sander Levin, D-Mich., ranking minority member of the Ways and Means Committee, said in a floor speech that Congress should extend the BAB program as part of efforts to promote economic growth and job creation.

Levin’s Building American Jobs Act, introduced in March, would revive BABs through 2012 with federal subsidy rates of 32% in 2011 and 31% in 2012. The bill would also allow BABs to be used to currently refund previously issued BABs.

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