Aug. 4 (Bloomberg) -- Senate Republicans bet on luring Democrats into voting for a reduction of the estate tax by combining it with an increase in the minimum wage and popular tax breaks. Last night they lost.

The Senate fell four votes short of the 60 needed to move forward on what Majority Leader Bill Frist called the ``trifecta'' legislation.

``The bottom line is that we bet on the wrong horses,'' said Finance Committee Chairman Charles Grassley, an Iowa Republican. ``Maybe we should've taken a bet that was more likely to pay off.''

The Senate, just before recessing for the rest of August, did approve 93-5 a measure to overhaul the U.S. private pension system that now heads to President George W. Bush's desk. Left behind are the pieces of the trifecta legislation.

Frist, a Tennessee Republican, changed his vote on the trifecta to ``no'' at the last minute to reserve his right to bring the measure before the chamber again in the future. With the votes of Frist and absent Senator Max Baucus, a Montana Democrat who has supported an estate tax rollback before, the tally would have been 58-41, one better than when the Senate last voted on the estate tax in June.

Republicans said they intend to try again on the estate tax and will seek to turn the issue to their political advantage. ``It's the political season, so they didn't want to give us a victory, but it's great issue for our folks to talk about,'' said Senator John Thune, a South Dakota Republican.

Frist, after the vote, said the components of the trifecta measure ``are issues that matter in the day-to-day lives of our constituents.''

`Absolutely Unaffordable'

Democrats said the attempt to increase the minimum wage by $2.10 over three years and extend important expiring tax cuts, such as a college tuition credit, was poisoned by Republican insistence on adding about $268 billion in estate tax cuts for the nation's wealthiest families.

``This is absolutely unaffordable at a time when we are running massive debt,'' said Senator Kent Conrad, a North Dakota Democrat.

The tax-cut extensions, for which Democrats vowed to keep pushing, include a research credit for 16,000 U.S. companies, a federal deduction for state and local sales taxes and incentives for employers to hire former welfare recipients.

The package would extend a deduction for teachers who buy their own classroom supplies, a $5,000 credit for people who purchase a home in the District of Columbia for the first time and a tax credit for people who buy certain types of electric vehicles.

Not Take Chances

``My interest has always been to accomplish what is possible, not taking chances with widely-applicable tax relief measures that millions of taxpayers are relying on,'' Grassley said in on the Senate floor last night.

Grassley complained that his House Republican counterparts pushed for the trifecta plan even as he counseled against it. ``The process was lousy and offensive,'' Grassley said, adding that he supported the substance of the measure.

Bush hasn't said whether he will sign the pension measure. Last month, when the House approved the same legislation, a White House spokeswoman called it ``an important step'' toward improving the nation's pension system.

The pension measure gives a break to airlines struggling in bankruptcy, permits investment companies to advise employees on the retirement funds and sets rules for companies most likely to shed their pension plans on how quickly they must fully fund them.

Liability Shield

The legislation would force companies that offer 44 million U.S. workers defined-benefit pensions to pay more into those plans, which the Labor Department says were underfunded by $450 billion last year.

The number of defined-benefit plans has shrunk from more than 100,000 in the 1980s to 30,000 today as more companies switch to cheaper 401(k) plans. To spur new retirement saving, the measure provides a liability shield to companies to encourage them to automatically enroll employees in 401(k) plans -- a move that could bring in as much as $1.8 trillion in new retirement savings.

The measure will require companies that still have defined- benefit plans to use a lower interest rate to calculate the return on their fund investments. That will force them to put more money into the plans because future returns would be lower.

Help for Airlines

The measure will give Atlanta-based Delta Air Lines Inc. and Egan, Minnesota-based Northwest Airlines Corp., both operating in bankruptcy, 10 extra years to catch up on pension funding. The two airlines also can use a generous interest rate, 8.85 percent, to calculate the return on their investments and therefore the amount they must contribute each year.

Two other airlines, Continental Airlines Inc., based in Houston, and AMR Corp.'s American Airlines, based in Fort Worth, Texas, unsuccessfully sought the same conditions. Although they aren't in bankruptcy, they said giving such a big break to Delta and Northwest gives them an unfair competitive advantage.

Continental and American will instead get a three-year extension and the same interest rate as everyone else -- about 6 percent.

Senator Kay Bailey Hutchison, a Texas Republican, said she voted for the pension measure after receiving assurances from Senate leaders that they would re-examine the issue later this year.

Companies such as New York-based Goldman Sachs Group Inc. and Boston-based Fidelity Investments will be able to directly advise employers and employees about 401(k) and IRA retirement accounts that they manage. To avoid conflicts of interest advisers will have to use a computer model for 401(k) plans that calculates the best plans for each employee. The measure offers incentives for advisers to use a similar model for IRAs.

Legal Assurance

The legislation will also provide some legal assurance for the more than 1,800 companies that have switched to hybrid defined-benefit plans, which combine the federally backed traditional plans with a more portable 401(k)-type plan.

The measure also provides additional tax breaks for employees who invest in Individual Retirement Accounts and clarifies rules on how pension funds can be invested, allowing hedge funds to accept more money from corporate pension plans before facing restrictions on the way they manage the assets.

To contact the reporter on this story: Jay Newton-Small in Washington at jnewtonsmall@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: August 4, 2006 01:08 EDT