Injury-hit Smith, 30, has a year left on his Toon deal and old club Leeds cannot afford to pay him anywhere near his £60,000-a-week salary.
But The Sun report that the Magpies are willing to put £30,000 a week towards his Elland Road wage next term, with Leeds stumping up a further £15,000 to coax Smith back to his hometown team.
Newcastle's proposal means Rothwell-born Smith would be dropping only £15,000 a week to finish his career where it all began 14 years ago.
Striker-turned-midfielder Smith is currently thinking over his future while on holiday in America.