Effort to repeal oil tax breaks fails in Senate

WASHINGTON (Reuters) - The Senate on Tuesday rejected a measure that would have repealed some $35 billion in oil and gas industry tax breaks as it continued work on a bill that would raise taxes on investment fund managers.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 will likely scale back the legislation if, as expected, Democratic leaders fail to muster the 60 votes needed for a test vote on Wednesday.

Senate Majority Leader Harry Reid said the Senate will vote Wednesday morning on a budget challenge to the bill. If it fails the test vote, Democrats plan to put forward a modified bill in hopes of winning over a few Republicans.

Democratic leaders are looking at scaling back a measure that postpones 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, aides said. They also could alter some small business tax provisions in hopes of wooing some moderate Republicans.

Reid said the Senate will consider a Republican alternative that would extend unemployment insurance for 30 days, but exclude the controversial tax-raising provisions and also exclude a provision extending tax-exempt Build America Bonds, created in the stimulus plan 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.