Getting rid of tax breaks for churches and axing the school chaplaincy program could save the federal budget $250 million a year.
Liberal Democrats senator David Leyonhjelm says the government should consider the move, which he has had costed by the Parliamentary Budget Office, in this year's budget.
"This Easter, the Liberal Democrats propose a $250 million annual boost to the budget by abolishing taxpayer support for religion," Senator Leyonhjelm told AAP on Thursday.
Religious bodies receive tax exemptions for some fringe benefits and receive GST-free status for sales of religious services.
The Christian church had made a "significant contribution to liberal democratic values" and had a right to impose religious tests for membership and employment, the senator said.
"However, we do not consider it appropriate for taxpayers to pick up the tab for what is fundamentally a private matter."
The PBO costing showed the chaplaincy program cut would save $60 million and the abolition of tax concessions for religious organisations would boost revenue by $190 million.
Senator Leyonhjelm said there was also an argument for removing tax deductibility for donations to charities.
"The more people see the government jumping in and doing things, the less individuals will do," he said.
"What government should do is retreat from that space and just provide a safety net."
AAP pjo/rl/gb
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