By Kim Dixon and Thomas Ferraro
WASHINGTON (Reuters) - Max Baucus, the Democratic chairman of the U.S. Senate Finance Committee, said on Tuesday he will not seek re-election next year, improving Republican chances of capturing his seat and giving him a freer hand in his bid to revamp the tax code.
First elected to the Senate in 1978, Baucus, 71, will become the eighth senator - six Democrats and two Republicans - to announce plans to retire at the end of next year.
Baucus pledged to serve out his term and focus on fixing the tax code and other economic challenges.
"I'm not turning out to pasture because there is important work left to do, and I intend to spend the year-and-a-half getting it done," he said.
Democrats now hold the Senate, 55 to 45. Baucus, of Montana, won a sixth term with 73 percent of the vote in 2008. He had been favored to win a seventh term but could have faced a competitive race, according to analysts.
"I think he knew that no matter what, he would have to raise $15 million and that was going to be a slog," said David Parker, a political scientist at University of Montana, who also noted some weak approval ratings in polls.
Jennifer Duffy, who tracks Senate races for the non-partisan Cook Political Report, said she was changing her rating of the 2014 Senate race in Montana from "lean Democrat" to "toss up."
As Senate Finance chairman, Baucus played a key role in President Barack Obama's overhaul of the U.S. healthcare system, signed into law in 2010 and known widely as Obamacare. But he struggled to reconcile his conservative constituency with the more liberal Democratic caucus.
Obama issued a statement thanking Baucus for his service.
Baucus is working closely with his House of Representatives counterpart, Republican Dave Camp, on rewriting the complicated tax code, a project that faces major obstacles.
Still, by retiring, Baucus could free himself from the political pressures of running for re-election, but that would not reduce by much the challenges of a tax-code overhaul.
"It may suggest that he is going to devote 100 percent of his energy to tax reform, so that may be a boost for getting it done, because both he and Camp are on the same schedule now," said Ken Kies, a veteran tax lobbyist.
Camp will lose the gavel of the tax-writing House Ways and Means Committee in 2014 under House rules.
TAX REFORM OBSTACLES
Regardless, major challenges remain, beginning with Republican opposition to calls by Democrats to raise new tax revenue by curbing tax breaks for the wealthiest Americans.
"His leverage will surely decrease as the end of his term approaches," analyst Jim Lucier of Capital Alpha Partners said.
If Democrats retain the Senate in next year's election, Senator Ron Wyden would be next in line in party seniority to replace Baucus as Finance Committee chairman.
Wyden declined to comment on his plans, but the Oregon Democrat has several tax reform proposals of his own.
The Finance Committee controls tax, trade and healthcare issues, but the power of committees has waned in recent years as congressional leadership has taken over major decisions, to the frustration of many Senate old-timers.
The tax code has not been substantially changed since 1986, when President Ronald Reagan struck a deal with a divided Congress to lower rates, and cut exemptions and special breaks.
Obama says he backs a major rewrite, but the disagreements over the details - which might include clipping popular tax breaks - make the project politically difficult.
Camp is expected to introduce legislation this year, though the timeline of that has been postponed before.
The next fiscal deadline will be the exhaustion of the government's debt limit in July or August, which could give a boost to tax reform efforts, said Sean West, an analyst at research firm Eurasia Group.
"The key signpost to watch remains whether House Republicans make tax reform their debt-limit demand, which would give President Obama a strong incentive to build public support," he said.
A MODERATE IN MONTANA
Baucus is a moderate in a rural state that went for Republican Mitt Romney over Obama in last year's White House race, 55 percent to 42 percent.
Former Montana Democratic Governor Brian Schweitzer is seen as a top contender to run for Baucus's seat, while Representative Steve Daines is among possible Republican candidates.
As a moderate, Baucus often butts heads with more liberal members of Congress, including those in the Democratic leadership.
He broke with his party to vote for tax cuts engineered by President George W. Bush in 2001, and to add a prescription benefit to the Medicare health plan for the elderly.
Baucus, who is an avid runner and begins nearly every speech with a quote from a famous person, also opposed the Senate Democrats' budget resolution last month that sought to raise taxes and voted against Obama's effort to curb gun violence with new controls on firearms.
A liberal Democratic group praised his decision to retire.
"Good bye, Senator K Street," Stephanie Taylor, co-founder of the Progressive Change Campaign Committee, said, using a shorthand term for Washington lobbyists. "Montana will finally have a chance to have a senator with its best interests at heart, and we hope Brian Schweitzer jumps into the race immediately."
Baucus also wrestled with defending Obama's healthcare law he was instrumental in shepherding through the Senate. The law is unpopular in Montana, and Baucus recently worried at a hearing that poor implementation would cause a "train wreck."
He has also been a champion for trade agreements, prodding Obama to push for approval of free trade pacts with South Korea, Colombia and Panama.
The seven senators who earlier announced they would not run for re-election are Democrats Carl Levin of Michigan, Frank Lautenberg of New Jersey, Tom Harkin of Iowa, Tim Johnson of South Dakota and Jay Rockefeller of West Virginia, along with Republicans Saxby Chambliss of Georgia and Mike Johanns of Nebraska.
(Reporting by Kim Dixon and Thomas Ferraro; Additional reporting by Jonathan Weber; Editing by Kevin Drawbaugh and Eric Beech)