The vote was 52-48 with oil-state Democrats joining Republicans in tanking the measure, Politico reported.
While Republicans are adamant there be no tax increases, Senate Democratic leaders, who knew going into the vote it would fail, say they will keep pushing to end the tax breaks for the largest oil companies at a time when they are reaping phenomenal profits.
"I am confident that before we finish our budget negotiations here and in anticipation of raising the debt ceiling that that would be part of it," Senate Majority Leader Harry Reid of Nevada told reporters before coming out on the losing end of the vote.
His New York colleague, Chuck Schumer, agreed.
"Certainly our proposal for deficit reduction will include the elimination of these subsidies," Schumer said. "I believe that all of us in the leadership -- and I think pretty broad consensus in our caucus -- [believe] that this is a place to start."
Senate Minority Leader Mitch McConnell of Kentucky, who is taking part in bipartisan budget talks with a group that includes Vice President Joe Biden, has said taking away the oil industry incentives are a non-starter.
"That's not the kind of thing we're going to be dealing with here in connection with the serious talks that are going on with the vice president's group," McConnell said Sunday. "We are not going to raise taxes in connection with this problem."
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