Members of the U.S. House voted 269-156 Thursday to pass a bill that would increase the estate tax exemption to $5 million per individual, or $10 million for a married couple.

The bill that passed, an amended version of H.R. 5638, would set the estate tax rate at a level equal to the capital gains tax rate for estates with $5 million to $25 million in assets, and it would set the estate tax rate at twice the level of the capital gains tax rate for estates with more than $25 million in assets, according to the bill text.

The current capital gains tax rate is 15%. The rate is scheduled to jump up to 20% in 2011.

Rep. Jim McDermott, D-Wash. observed during floor debate about the bill that “scarcely a dozen” House members were actually in the chamber. He said the rest, watching on television from their offices, were seeing “not the House of Representatives but the theater of the absurd.”

The estate tax was started by a “public-spirited Republican,” Teddy Roosevelt, McDermott said.

“It is used as way to finance the things that we think we ought to do,” McDermott said. “You talk about the calls you receive from you district. Bill Gates called me, and he said, ‘Don’t vote for estate tax repeal.’”

Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee and primary author of the bill, said Gates’ call was misplaced.

“We are not voting to repeal the death tax,” Thomas said. “We are producing a compromise which will be passed by this House and move to the other chamber.”

Thomas said new version of H.R. 5638 passes the “Goldilocks test.”

“For some it’s too hot, for some it’s too cold,” Thomas said. “It sounds to me like we’ve got a compromise that might have chance at being passed by the U.S. Senate.”

Rep. Richard Neal, D-Mass., referring to an advertising campaign backed by the Coalition for America’s Priorities, a group that is believed to have support from the life insurance industry, said H.R. 5638 should be called “the Paris Hilton Tax Relief Act.”

“She will be in great spirits this evening when she finds out that the Republican party has come to her aid again,” Neal said. “This Congress has bent over backwards to help the richest in this country. Is there no end to this?”

Many members of the House and Senate have concerns about the effects of estate tax changes on federal revenue.

The new version of H.R. 5638 might eliminate about $283 billion in federal revenue from 2006 to 2016, according to the Joint Committee on Taxation.

In the Senate, a key step will be a vote that will determine whether supporters of the H.R. 5638 compromise can round up 60 votes to pass a “cloture motion,” or limit on debate on the bill. If opponents can persuade 40 senators to oppose the cloture motion, then the threat of endless debate could kill the bill.

In a note to investors, Joe Lieber of Washington Analysis, Washington, says H.R. 5638 “faces an uphill battle” for Senate passage.

“We believe Senate Minority Leader Harry Reid, D-Nev., will put the utmost pressure on fellow Senate Democrats to oppose this new revamped measure due to its high cost and Democrats’ desire not to give the Republicans a victory on such a major item this close to the election.”

However, even defeat of a cloture motion in the Senate is unlikely to end legislative debate and action on the estate tax issue.

Insurance industry lobbyists and congressional staffers say Sen. William Frist, R-Tenn., Senate majority leader, is considering a number of other approaches to get a proposal Senate Republicans can support through Congress if H.R. 5638 fails to get through the Senate.

Strategies for passing an estate tax measure could include attaching the bill to must-do pension legislation, or adding the measure to legislation backed by the Democrats that would raise the minimum wage to $7.25.

Senate Democrats appear to be supporting a proposal that would use the current-law rules for 2009 to create a permanent change in the estate tax system.

Under current law, the per-spouse exemption will be $3.5 million in 2009, and the maximum tax rate will be 45% rate.

The exemption for 2006 is $2 million per person and the maximum tax rate is 46%.

Under current law, the estate tax would be repealed in 2010. But, unless the law is renewed, the tax would revert to 2001 levels in 2011. That would push the estate tax exemption down to $1 million and increase the maximum tax rate to 55%.

The insurance industry is coalescing around legislation that would establish a $2.5 million-per-person exemption and a 45% maximum tax rate.