Members of the Senate have rejected efforts to close off debate on an estate tax repeal bill that could have wreaked havoc on core life insurance products.

Supporters of the bill, H.R. 8, needed 60 votes to “invoke cloture,” or arrange to limit debate on the bill. The final vote on the motion that would have limited debate was 57-41.

At press time, shortly after the vote, Senate Republican leaders withdrew to determine whether they would seek an immediate vote on a compromise “reform” bill that would substantively slash the estate tax, which Democrats have called a stealth attempt at full repeal.

But insurance industry lobbyists and congressional staffers were saying that the 57-41 vote implied that, despite intensive pressure on moderate Republicans and on Democrats by supporters of full repeal or its equivalent, the votes to accomplish that this year might not be there.

“The vote could be read as a repudiation not only of repeal but of the efforts at reaching a compromise” proposed by Sen. John Kyl, R-Ariz., the chief sponsor of repeal, according to an insurance industry lobbyist who asked not to be named.

“There may be a need for repeal advocates to go back to the drawing board,” the lobbyist said.

The original compromise bill would have established a $5 million-per-spouse estate tax exemption, and the rate on estates subject to the tax would have been 15%, the capital gains rate.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, tried to appeal to Democrats at the last minute by adding language that would have taxed assets above $30 million at a 30% rate.

But Sen. Harry Reid, D-Nev., Senate minority leader, said during the debate leading up to the cloture vote that compromise “is full repeal anyway” and it “doesn’t even pass the laugh test.”

Under current law, the estate tax exemption would rise from $1.5 million per spouse in 2005 to full repeal in 2010. But, unless the current law is renewed, the tax will revert to 2001 levels in 2011. In 2001, the exemption was $1 million per spouse, and the rate applied to taxed estates was 55%.

The National Association of Insurance and Financial Advisors, Falls Church, Va., and an affiliated group, the Association for Advanced Life Underwriting, Falls Church, Va., support a reform package with a $2.5 million exemption and a top rate of 45%.

This plan also would sustain the current policy of a tax basis for transferred assets.

The trade groups and their members contend that proposal would exempt 99.7% of Americans from paying any estate tax and would cost less than half as much as repeal.

“We believe this would be sustainable over the long term,” says David Stertzer, chief executive of the AALU.

Michael Kerley, senior vice president for federal government relations at NAIFA, called the Senate vote “pure partisan politics.

“Unless the leaders in the Senate set about truly creating a bipartisan bill, I don’t see this going anywhere,” Kerley said.

The insurance industry’s concern is that “if that you repeal the estate tax, it will in fact siphon off a lot of tax revenue that we would want to use for other tax incentives that will help the public,” Kerley said.

Kerley cited long term care insurance, health insurance, life insurance and disability income insurance as examples of products that could be supported by new incentives.

“We believe that a much, much, much larger segment of the public would be helped by giving tax breaks to those products than would be helped by repealing the estate tax,” Kerley said.

“If the Republicans and Democrats can work out an acceptable compromise, it can easily pass the Senate,” Kerley added. “But it has to be a true compromise.”

“Supporters of full repeal have known that this bill was unlikely to move forward this year,” Sen. Max Baucus, D-Mont., ranking minority member on the Senate Finance Committee, said after the vote.

“With the possibility of full repeal cut off, it’s time to find an alternative solution that will offer relief to folks like the ranchers and farmers in my home state of Montana,” Baucus said.

Baucus’s support is believed to be crucial to passage of any estate tax-related bill.

Senate Majority Leader William Frist, R-Tenn., who lobbied intensely for passage of H.R. 8, expressed his disappointment at the outcome of the vote.

“The Death Tax is an unfair burden inflicted upon America’s small businesses, farmers and families during a time of grieving and pain,” Frist said.

“It’s unfortunate that a minority of my Senate colleagues have blocked debate on permanent repeal of this wrongheaded tax,” Frist added. “This won’t be the last time this year the Senate votes on this important issue –be it on the floor or in some other form. Getting rid of the death tax is just too important an issue to give up so easily.”