In a 269-156 vote on June 22, the House passed compromise legislation “reforming” the federal estate tax system at a cost far exceeding the exemption levels supported by the insurance industry.

The House action was taken despite passionate Democratic opposition and parliamentary confusion that delayed the vote for several hours.

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

He noted that the estate tax was started by a “public-spirited Republican,” Teddy Roosevelt. “It is used as way to finance the things that we think we ought to do.

“You talk about the calls you receive from you district. Bill Gates called me and he said ‘don’t vote for estate tax repeal.’”

But Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee and primary author of the bill, said the call was misplaced. “We are not voting to repeal the death tax,” he said. “We are producing a compromise which will be passed by this House and move to the other chamber.”

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

Rep. Roy Blunt, R-Mo., the majority whip, noted, “I’ve never thought that a trip to the undertaker should necessitate a trip to the IRS.”

And, in a comment prompted by an advertising campaign prepared by the Coalition for America’s Priorities, a group a source says was financed by the Association for Advanced Life Underwriting, Falls Church, Va., Rep. Richard Neal, D-Mass., said the bill should be called “the Paris Hilton Tax Relief Act”–not Baron Hilton, but Paris. The mention of Hilton is a reference to the ad campaign.

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

The original House bill, introduced on June 19, would have cost $280 billion in federal revenues over 10 years, according to Joint Committee on Taxation Estimates. The bill, H.R. 5638, is called “the Permanent Estate Tax Relief Act of 2006.”

A compromise supported by Senate Republicans would have cost $275 billion over 10 years.

But the cost of the House bill was increased through an amendment that indexed the threshold levels to inflation, adding an additional $4 billion to the price-tag. The amendment indexes the $5 million per person exemption to inflation.

The House action sets up another vote in the Senate on the issue, where 60 votes are needed to limit debate. The vote could possibly be as early as June 22.

However, even defeat of the so-called cloture motion in the Senate is unlikely to put the issue, a critical one for the insurance industry, to rest.

Industry lobbyists and congressional staffers say that Sen.William Frist, R-Tenn., Senate majority leader, is considering a number of other approaches to get a reform proposal Senate Republicans can support through the Congress this year if the bill passed in the House on June 22 fails to pass muster in the Senate.

These include attaching the bill to must-do pension legislation, and even adding a provision being pushed by Democrats that would raise the minimum wage gradually to $7.25 in three steps.

In a note to investors, Joe Lieber of Washington Analysis said the bill “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.”

The new Thomas bill would increase the exemption amount to $5 million per person effective Jan. 1, 2010, and it would reduce the tax rate on estates up to $25 million to the capital gains tax rate. That rate is 15% today but will increase to 20% in 2011 unless Congress intervenes.

The bill also would reduce the rate of tax on estates of $25 million or more to twice the capital gains rate. That rate is 30% today but will increase to 40% in 2011 unless Congress intervenes.

Senate Democrats appear to be supporting a proposal that would use the current-law rules for 2009 to create a permanent fix. 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 present law, the exemption gradually rises to full repeal in 2010. But, unless the law is renewed, the tax would revert to 2001 levels, which allowed only a $1 million exemption per spouse and imposed a maximum tax rate of 55%.

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

One significant feature of the latest House bill is the retention of a stepped-up basis for assets once the assets are bequeathed by an estate.

Another significant feature would eliminate a carry-over basis provision included in some proposals. The carry-over basis provision could have saddled some beneficiaries with big capital gains tax bills, experts say.

Reacting to the vote, Michael Kerley, senior vice president, federal government relations, at the National Association of Insurance and Financial Advisors, Falls Church, Va., said passage of the House was “fully expected,” and that the “real story will be told in the U.S. Senate.”

“For its part, NAIFA and its allies will continue to press for a long range, politically sustainable compromise,” Kerley said. “We think that freezing and extending the exempt amount and tax rates in force in 2009 would do it.” Specifically, that would grant each person an exemption of $3.5 million per person–$7 million for a married couple–and a top tax rate of 45%.

“That would lose about 50% of the revenue that would be lost with full repeal, and would exempt 997 estates out of 1000 from any tax,” Mr. Kerley added. “That strikes NAIFA as a reasonable compromise.”

Dermot T. Healey, president of the AALU, said, “I have talked directly to my senators and many of my fellow members have weighed in with their senators as well about this important issue.

“I recognize and appreciate the need for certainty, but we need long-term certainty, and very expensive reform options will not provide certainty over the long term,” Healey added.

David Stertzer, CEO of the AALU, said, “Since the beginning of this debate in 2001, AALU has been a leader in promoting permanent, sustainable and immediate estate tax relief that will enable our members’ clients to be able to plan with certainty.

“We have also been strong proponents of retaining the step-up in basis and reunifying the lifetime estate and gift tax exemptions,” Stertzer added.

“We continue to believe that the best way to ensure long-term certainty is to enact an estate tax reform proposal that doesn’t cost more than 50 percent of the projected cost of repeal and would exempt the vast majority of Americans from estate tax liability, while allowing those still subject to the tax to plan with certainty and preserve much needed revenue for more pressing national priorities,” he said.