A decision last week by the Senate Republican leadership to postpone a vote on a bill on estate tax reform until after Congress returns from its July Fourth recess may be increasing the odds that Republicans will be unable to push through the measure.

The decision to postpone the vote until after Congress returns on July 10 was announced June 27 by Sen. William Frist, R-Tenn., Senate majority leader. It was a sign that despite intense pressure on Democrats to help provide the 60 votes needed to clear the bill for floor debate, Republicans were still short.

“The votes are not there,” said Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, in comments to reporters June 28. “But the votes may be there in the future,” he contended.

But others are not so sure.

David Stertzer, CEO of the Association for Advanced Life Underwriting, which has been leading the lobbying effort against the bill, said the Frist announcement “is an incrementally positive development, given that this proposal is likely unsustainable, because it would cost nearly 80% of the cost of full repeal.”

He said that AALU members “around the country have stayed in contact with their senators, providing them information on the long-term budgetary implications of full repeal or ‘reform’ alternatives that are tantamount to repeal from a federal revenue standpoint.

“We will encourage our members to continue these outreach efforts during the Fourth of July recess while senators are at home in their states,” Stertzer said. “Our members will continue to advocate for a fair and permanent solution to this issue.”

Dermot Healey, president of AALU, did caution the industry is concerned about reports that there have been increasing negotiations regarding throwing in unrelated “sweeteners” to entice certain senators to vote for an estate tax reform proposal that they might otherwise not support given its significant cost.

“This already has occurred to some degree with the inclusion of a provision favorable to timber interests in the House-passed estate tax reform bill that is unrelated to the underlying bill,” he said.

“We are asking our members to encourage their senators not to be swayed by such efforts given the magnitude of the cost of this estate tax reform proposal,” Healey said.

Sen. Mark Pryor, D-Ark., a primary target of the Republicans seeking Democratic votes, did confirm that he has had discussions relating to tax legislation he champions to spur investment in poor rural areas. But Pryor told The Wall Street Journal that he still was concerned by the costs of the House package, $284 billion over 10 years.

Such sweeteners, however, could pull other votes away from the package, other lobbyists pointed out.

The vote would have been on a bill passed overwhelmingly by the House 269-156 on June 22, H.R. 5638, “the Permanent Estate Tax Relief Act of 2006.”

Sen. Max Baucus, D-Mont., said he believed the plan passed by the House would fail to attract support from any additional Democrats beyond the four that voted for a more far-reaching full repeal measure earlier in June.

Baucus, who supports full repeal, told reporters that efforts to pass a compromise will become “more difficult” after the July Fourth recess.

In his June 27 statement, Frist said, “Everyone should be clear: The Senate will vote on a permanent reduction to this tax– a tax that destroys small businesses and family farms.” Frist added, “The vast majority of my Democratic colleagues have so far refused to address this issue; it’s my hope that their constituents will use the upcoming recess to explain the importance of supporting a reasonable and permanent solution to this unfair tax.”

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

But despite the pressure Frist put on Democrats, there also is concern within his own caucus about the House bill.

First, it would not give credit toward federal estate taxes for state taxes on estates. Second, the rates paid above the threshold level under the House bill would be linked to the capital gains tax rate, now 15%.

The concern of Republicans is that when the 15% rate comes up for renewal in 2010, it would “poison the waters” for keeping the rate at 15% and not returning it to the old rate of 20% that existed before 2002.

The House 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.

The bill also would reduce the rate of tax on estates of $25 million or more to twice the capital gains rate. That rate would be 30% today, but it would increase to 40% in 2011 unless Congress intervenes. Under the House bill, the threshold level of $5 million-per-person exemption is indexed to inflation.

Senate Democrats appear to be supporting a proposal that would use the current law’s 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%.

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 allows only a $1 million exemption per spouse and imposes 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.