Throughout most of its history, the federal government has depended upon wealth transfer taxes only during times of extraordinary revenue demands, such as in time of war. The clearest example is the Civil War: A wealth transfer tax was enacted in 1862 and, when no longer needed, repealed in 1870.

Wealth transfer taxes were also called upon in 1797 (revenue needed for strong naval force; tax repealed in 1802); in 1898 (revenue needed for Spanish-American War; tax repealed in 1902); and in 1916 (revenue needed to offset reduced U.S. trade tariffs during World War I).

In other words, during the 119-year period beginning in 1797 and ending in 1916, we had a federal wealth transfer tax in only 17 of those years.

Since 1916 -- 84 years -- the estate tax has never been repealed.

Currently the estate tax is raising significant revenue. In addition, there is untold wealth projected to be passed on by older Americans in the coming years; this event is projected to raise significant revenue.

In the face of current and projected revenue from the estate tax, the federal government will not, in this writer's opinion, abolish the estate tax. Consider that the estate-tax repeal passed by the Republican Congress earlier this year would not have become effective until 2010, so the federal government would have plenty of time to scale back the "repeal."

On the other hand, perhaps repealing the estate tax would have the effect of raising even more revenue. Here note that the estate-tax repeal under discussion includes eliminating, to some extent, the step-up in tax basis at death. Recall that when a lifetime gift is made, the donee takes, in general, a carryover basis in the gifted property. By contrast, a so-called "stepped-up basis" (to fair market value) is obtained, in general, on a death transfer.

By way of illustration, suppose the federal government does not wait until 2010 to repeal the estate tax. Suppose the repeal is effective today, along with the repeal of the step-up in tax basis at death. Suppose an unmarried client, an Alaska domiciliary, dies today with $1,000,001 worth of publicly-traded stock. She held the stock long-term, had no other assets, and never made a taxable gift. Her tax basis in the stock was $1.

In a world with no estate tax and no step-up in tax basis at death, the client's beneficiary would receive a carry-over tax basis of $1 in the stock. So when the beneficiary sells the stock, the beneficiary could owe roughly $200,000 in federal income tax under today's capital gain rate, in general, of 20 percent.

In contrast, had the estate tax and step-up in tax basis at death been left intact, the client's estate taxes would have been roughly $125,000. This figure of $125,000 in estate taxes is $75,000 less than the $200,000 in capital gain tax under our previous example. Moreover, the client's beneficiary would have received a step-up in tax basis of $1,000,001 in the stock; so the beneficiary would have been free to sell the stock for as much as $1,000,001 at absolutely no income tax cost.

To create true tax reduction, at least initially, the theory under discussion is that the repeal of the step-up in tax basis at death will apply only to the rich. In other words, each of us might be given a limited exemption amount with respect to which assets, sheltered by that exemption, could enjoy a step-up in tax basis.

But it does not take a Washington insider to anticipate that the federal government could some day extend carry-over tax basis to all taxpayers. Meanwhile, the federal government could increase the capital gain rate. To add insult to injury, the federal government could also someday reinstate the estate tax, while leaving carryover tax basis at death and a higher capital gain rate in place.

Repeal of the federal estate tax could cause Alaska and other states to institute significant death taxes. Under current law, on the death of an Alaskan or a person holding property in Alaska, the state "picks up" its share of the estate-tax credit that the federal government allows for death taxes actually paid to any state. Accordingly, the Alaska estate tax is often referred to as a "pickup tax."

In other words, the current Alaska estate tax can, in general, be thought of as not increasing estate taxes but rather as a revenue sharing mechanism. But if the federal estate tax is repealed, then a material source of revenue for the state will no longer be available. Faced with a need for revenue, Alaska could institute a significant death tax. Later, the federal estate tax could be reinstated and Alaska may choose to continue its separate (and then additional) death tax.

In the end, any "repeal" of the federal estate tax could be the beginning of a whole new round of direct or indirect tax increases. But who knows? Maybe the politicians will surprise us.

Steven T. O'Hara is a shareholder in the Anchorage law firm of Bankston & McCollum P.C. This article is copyright 2000 by Steven T. O'Hara and is used by permission.