WASHINGTON–There is an increasing likelihood that the estate tax will expire at the end of the year because of congressional inaction–only to be reinstated retroactively at 2009 levels for an interim period early next year, according to an industry group.

The House Christmas recess scheduled to start Friday and the Senate’s focus on passing healthcare reform legislation before it leaves for the recess create the potential for the estate tax being in limbo for a short period, according to Sarah Spear, director of policy and public affairs for the Association for Advanced Life Underwriting.

The only potential vehicle for dealing with the tax would be the Defense appropriations bill, Spear said late Monday.

That bill might include a provision for either a 1 or 2 year “patch” keeping the tax at 2009 levels.

But this approach would not include the insurance industry’s priorities, which are to add reunification, portability and indexing for inflation to any permanent estate tax legislation, Spear said.

The House was scheduled to take up the appropriations bill before adjourning Dec. 18 and send it to the Senate, which would have to act before the House leaves. But there is no certainty this will happen, she said.

Estate tax limbo is likely to occur even though the House has already approved bare-bones legislation that would extend the 2009 estate tax rate permanently at a 45% tax rate and a $3.5 million per-person exemption.

Spear said that there are active discussions underway to reach agreement on a host of challenging year-end items, including raising the debt level, a jobs bill, the estate tax and other extenders.

Furthermore, the House’s defense bill is likely to include a so-called pay-go provision. This is a requirement that new spending or tax changes not add to the federal deficit. There is strong opposition to this provision in the Senate because the House’s version of pay-go exempts 4 big-ticket items.

Also muddying the issue is the move by Democratic leaders to raise the $12.1 trillion debt ceiling this month due to rising deficit costs. The debt ceiling is a limit established in law on the government’s overall borrowing authority.

The estate tax issue is critical because under existing law, it goes away for 2010, but returns in 2011 with a 55% tax rate and a $1 million per-person exemption. That is because the 2001 tax cut law expires Jan. 1, 2011, ending tax cuts valued at an estimated $3 trillion.