Estate tax repeal bill blocked in Senate

WASHINGTON (Reuters) - The U.S. Senate on Thursday killed a bill backed by President George W. Bush that would have permanently repealed estate taxes.

The Senate vote of 57-41, mostly along party lines, was three shy of the 60 needed for the measure to advance. The House of Representatives had previously passed a bill to wipe out what Republicans call the "death tax."

Republican backers had acknowledged they were short of votes for full repeal, but they had hoped for an election-year debate and planned to offer an alternative that would have reduced the tax rate and exempted all but the wealthiest estates from the tax.

Democratic opponents argued that full repeal of would cost the federal treasury about $1 trillion over the next decade. Many Democrats who voted against consideration of the bill said they were open to compromise but objected to an alternative being offered by Republicans.

Sen. Jon Kyl, an Arizona Republican and leading advocate for repeal, said Republicans were planning to offer a substitute measure that would exempt the first $5 million from taxation. Estates over that amount would be taxed at the same rate as capital gains, currently at 15 percent. The wealthiest estates over $30 million would be taxed at 30 percent.

Senate Democratic Leader Harry Reid of Nevada said the compromise "does not even pass the laugh test."

Senate Majority Leader Bill Frist, a Tennessee Republican, said he would try again this year to get a vote on estate tax repeal. Permanently repealing the tax is a long-standing Republican goal which could mobilize supporters ahead of the November midterm elections.

Bush's 2001 tax cut included a phase-out of estate taxes. Currently the first $2 million of an individual's estate and $4 million for a married couple is exempt and the rest is taxed at 46 percent. By 2009, the exemptions rise to $3.5 million for an individual and $7 million for a couple and the rate falls to 45 percent.

Total repeal would go into effect in 2010 but only for that year. In 2011 the tax would be reimposed on estates valued over $1 million and the top tax rate would revert to 55 percent.