Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., have introduced a proposal to reform the federal estate tax, which temporarily expired this year but is slated to increase to up to 55 percent next year for estates over $1 million.

Lincoln and Kyl’s proposal would require the Senate Finance Committee to amend H.R. 5297, the Small Business Lending Bill, to permanently set the estate tax rate at 35%, with a $5 million exemption amount phased in over 10 years and indexed for inflation. It would also provide a “stepped-up basis” for inherited assets.

“It’s time to take decisive action on the estate tax, and provide the permanent solution that Arkansas’ hardworking farmers and small businesses are desperately seeking,” Lincoln said in a statement. “Uncertainty in the estate tax law has caused incredible difficulties for these individuals, which is why I have fought for a quick resolution to the issue that is both permanent and fair.”

“If the Small Business Lending Bill is intended to help small business create jobs, wouldn’t it make sense to provide small business owners with the certainty that their tax rates aren’t going to skyrocket at the beginning of next year?” said Kyl. “In just six short months, American taxpayers will face the largest tax hike in history unless Congress acts. It is estimated that more than a half million American families will pay the estate tax over the next decade, and the lack of congressional action creates a tremendous amount of uncertainty for these families, small-business owners and farmers.”

The Lincoln-Kyl proposal provides an election for deceased taxpayers to either retain this year’s estate tax rate, which is zero percent with “carry-over basis,” or file under the provisions of the new bill.

Their proposal also instructs the Senate Finance Committee to offset the difference in revenue loss between the Obama administration’s proposed 45% estate tax rate with a $3.5 million exemption amount and their proposed reform.

If Congress does not act this year, the federal estate tax is scheduled to increase to 55% with only a $1 million exemption at the beginning of 2011.

Lincoln and Kyl introduced a similar measure in April 2009 that received broad bipartisan support and was successfully added to the non-binding congressional budget resolution.

In June, Sen. Bernie Sanders, I-Vt., introduced legislation co-sponsored by Tom Harkin, D-Iowa, Sheldon Whitehouse, D-R.I., and Sherrod Brown, D-Ohio, that would exempt the first $3.5 million of an individual’s estate from federal taxation ($7 million for couples), but tax estates valued between $3.5 million and $10 million at 45%, estates worth between $10 million and $50 million at 50%, and estates worth more than $50 million at 55%. The Sanders proposal would also include a billionaire's surtax of 10%.

The Senate may be spurred to action by reports that the estate of the late George Steinbrenner, the billionaire owner of the New York Yankees, will not be subject to the estate tax this year.