December 16, 2009 / 7:42 PM / 9 years ago

UPDATE 2-Democrats' effort to renew U.S. estate tax fails

* Current U.S. estate tax expires Dec. 31

* Democrats blocked in temporary extension (Adds lawmaker comments on possible attempt for extension, business group details)

By Kim Dixon

WASHINGTON, Dec 16 (Reuters) - An effort by Democrats to stop the repeal of a tax on wealthy estates in the United States has failed in the Senate, as Republicans blocked a renewal of the tax that expires in 15 days.

Senate Finance Committee Chairman Max Baucus failed on Wednesday in a procedural move to introduce a measure that would have extended the tax for two months and give lawmakers more time to work out a deal.

Without action, the 45 percent tax on estates after a $3.5 million exemption disappears for a year and then jumps to 55 percent, with an exemption of $1 million, in 2011.

The tax has divided Democrats, with conservatives from the party teaming with Republicans to propose a lower tax with a greater exemption level.

“Americans, even after informed that the estate tax may not apply to them, object to it on principle,” argued Senate Minority leader Mitch McConnell as he blocked Baucus’ effort.

Democratic leaders had hoped to extend the tax permanently, and the House of Representatives passed a bill to do that earlier this month. But the Senate is mired in its health-care debate, so floor time is scarce.

“We’re a little concerned that if it’s allowed to disappear (for a year), some lawmakers will be more tempted to make that permanent,” said Steve Wamhoff, legislative director for Citizens for Tax Justice, a group that calls for a more progressive tax system.

Assistant Senate Majority Leader Dick Durbin said there may be one more attempt to extend the tax in the Senate. If that fails, it will have to wait until next year.

Once the tax expires, those inheriting estates after Dec. 31 will have to pay capital gains taxes on any asset sold. The cost will be based on the original price of the property, which could mean record-keeping headaches and bigger tax bills for some people.

“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Baucus argued on the Senate floor.

Business groups are divided on the issue. The Chamber of Commerce has long called for abolition of the tax, though it recently said it was willing to back a continuation of the current law for the sake of certainty. Other business groups generally oppose the tax.

The estates of about a quarter of 1 percent of Americans would be subject to the tax under the House bill, according to the Brookings Institution-Urban Institute Tax Policy Center. (Additional reporting by Donna Smith; Editing by Leslie Adler and Dan Grebler)

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