House GOP leaders signaled their readiness to set aside efforts to permanently repeal estate taxes and push for lower rates instead.
The bill, scheduled for House debate Thursday, includes changes to timber taxation that could attract support from key senators.
The strong push by Republican leaders to cut what they call the "death tax" - a longtime GOP priority - pushes the issue forward just before an election with control of Congress at stake.
Ways and Means Committee Chairman Bill Thomas, R-Calif., said the new effort at compromise recognizes the impossibility of repealing estate taxes this year.
"Do you want to make a statement, or do you want to make law?" he said.
Rep. Kenny Hulshof, R-Mo., who introduced the bill passed by the House to repeal estate taxes, said lawmakers need to move on after a "bitter disappointment" in the Senate when opponents blocked that bill from moving ahead.
He called Thomas' proposal "a pragmatic approach and a permanent solution."
Compromise concept
Senators hoping to repeal the tax failed earlier this month to overcome opposition from most Democrats and a pair of Republicans. Senate Majority Leader Bill Frist, R-Tenn., appealed for help from House leaders to revive the tax reductions, urging them to add anything that could make the tax cut more attractive.
Thomas' proposed reduction in estate taxes may gain more traction in the Senate with inclusion of changes to timber taxation. The change gives companies a deduction for timber gains that makes their tax rate roughly equal to the 15 percent capital gains rate imposed on individuals.
All but one Washington state lawmaker urged Thomas in a letter to include the change in upcoming legislation to boost the timber and forest products industry, which "provides good jobs in many of Washington state's rural communities."
Senators sending a similar letter to Senate tax-writers included several Democrats that GOP leaders hope would vote for a reduced estate tax. They include Sens. Mark Pryor of Arkansas, Mary Landrieu of Louisiana, and Maria Cantwell and Patty Murray of Washington.
Landrieu said she had not looked closely enough at the legislation to say whether she could support it, but she noted the government's persistent deficits and the high cost of war in Iraq.
The timber change reduces taxes $940 million over the coming decade, according to the congressional Joint Committee on Taxation.
Effect on the states
The proposed estate tax reduction also eliminates a federal deduction for estate taxes levied by states.
"I really think it's going to make it harder for states to retain their estate or inheritance taxes," said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a liberal-leaning think tank.
The 24 states that levy those taxes collect about $4.5 billion each year, she said.
President Bush's first tax cut put the federal estate tax on a declining path through the decade and eliminated it in 2010. That temporary law expires and the estate tax reappears in 2011.
In 2006, there is a $2 million exemption and the top tax rate is 46 percent.
Thomas would instead increase the size of an estate exempt from taxation to $5 million per person or $10 million per couple. A surviving spouse could use the deceased spouse's unused exemption.
Estates worth up to $25 million would be taxed at rates equal to capital gains, currently 15 percent but scheduled to increase to 20 percent in 2011. Estates worth $25 million or more would be taxed at twice capital gains rates.