Effort to repeal oil tax breaks fails in Senate

WASHINGTON (Reuters) - The U.S. Senate on Tuesday rejected a measure that would have repealed some $35 billion in oil and gas industry tax breaks as it continued work on a bill that would raise taxes on investment fund managers.

The oil and gas industry measure by Senator Bernie Sanders, a Vermont independent, failed to muster even a simple 51-vote majority, although 60 votes were needed to pass it.

It was offered as an amendment to a bill that would extend unemployment insurance for hundreds of thousands of jobless workers whose benefits ran out last month and also renew a set of popular business tax breaks.

The bill faces a key procedural vote on Wednesday, but it appears doubtful that Democratic leaders will be able to muster the 60 votes needed to advance the bill to a final vote.

Only 35 senators backed the Sanders' amendment as a number of Democrats joined the Republican opposition to defeat it.

Sanders argued that big oil companies making billions in profits do not deserve the tax breaks at a time when the nation is facing record budget deficits and rising debt.

"With a record-breaking $13 trillion national debt and an unsustainable federal deficit, the last thing we should be doing is giving tax breaks to oil and gas companies that have been making enormous profits," Sanders said.

Opponents argued that removing the breaks for oil and gas drilling would hurt small producers as well as big oil companies.

Meanwhile, the Senate passed a measure offered by Democratic Senator Al Franken that would establish a homeowners advocate office to help people having problems getting mortgages adjusted in the Home Affordable Modification Program.

DEFICIT WORRIES

The $1.4 billion deficit and rising debt are contributing to voter unrest heading into the November congressional elections and lawmakers said they may have to scale back the legislation if Democratic leaders fail to muster the 60 votes needed to close debate on the bill.

"A lot of things will be on the table if we don't get cloture," said Democratic Senator Deborah Stabenow.

One of the items on the table is a measure postponing for 19 months a 21 percent Medicare pay cut for doctors treating elderly patients. The pay cut would be delayed, but for a shorter period of time, Democratic aides said.

The Senate could also consider an amendment by Senator Jon Tester that would eliminate an extra $25 a week increase in unemployment benefits that was part of President Barack Obama's economic stimulus package passed last year.

The tax extenders bill would add about $80 billion to the deficit over 10 years, according to the Congressional Budget Office.

The bill's $126 billion in spending would be offset in part by the increase in taxes on investment fund managers. The so-called carried interest proposal would have fund managers pay the ordinary income tax rate of 35 percent on a majority of earnings from managing investors' money. They now pay a 15 percent capital gains tax rate on those earnings.

The Senate bill would tax 65 percent of fund managers' income at the higher rate. A tougher version passed by the House of Representatives would tax 75 percent at ordinary income rates.

If the bill goes into effect in 2011 as planned, under current law the top income rate rises to 39.6 percent. The top long-term capital gains tax rate is also slated to rise in 2011 to 20 percent.