The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally define gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, would provide an exclusion from gross income for any qualified taxpayer, as defined, for amounts received in settlement for costs and losses associated with the 2020 Bobcat Fire in the County of Los Angeles, as provided.

Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

This bill would include additional information required for any bill authorizing a new tax expenditure.

This bill would declare that it is to take effect immediately as an urgency statute.

The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines define gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would, bill, for taxable years beginning on or after January 1, 2020, 2024, and before January 1, 2029, would provide an exclusion from gross income for any qualified taxpayer, as defined, for amounts received in settlement for costs and losses associated with the 2020 Bobcat Fire in the County of Los Angeles, as provided.

Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

This bill would include additional information required for any bill authorizing a new tax expenditure.

This bill would declare that it is to take effect immediately as an urgency statute.

The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill would, for taxable years beginning on or after January 1, 2020, and before January 1, 2029, provide an exclusion from gross income for any qualified taxpayer, as defined, for amounts received in settlement for costs and losses associated with the 2020 Bobcat Fire in the County of Los Angeles, as provided.

Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

This bill would include additional information required for any bill authorizing a new tax expenditure.

The bill would make legislative findings and declarations regarding the public purpose served by this bill.

This bill would declare that it is to take effect immediately as an urgency statute.

GOVERNOR'S VETO

GV Bill Id:AB 1973

Author:(Lackey)

As Enrolled Ver:August 31, 2024

2/3 vote

SUMMARY

Excludes from gross income amounts received in settlement arising out of the 2020 Bobcat Fire, as provided.

Major Provisions

1. Excludes, under the Personal Income Tax (PIT) Law and the Corporation Tax Law, any "qualified amount" received by a "qualified taxpayer," for taxable years beginning on or after January 1, 2024, and before January 1, 2029.
2. Defines a "qualified amount" as any amount received in settlement by a "qualified taxpayer" from a "settlement entity" in connection with the 2020 Bobcat Fire.
3. Defines a "qualified taxpayer" as:
   1. Any taxpayer that owned real property located in the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire; or,
   2. Any taxpayer that had a place of business within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
4. Provides that, for this bill's exclusion under the PIT Law, a "qualified taxpayer" includes any taxpayer that resided within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
5. Defines a "settlement entity" as Southern California Edison (SCE) or its subsidiary.
6. Finds and declares, for the purposes of complying with Revenue and Taxation Code Section 41, that the goal, purpose, and objective of this bill is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from the devastating 2020 Bobcat Fire. The performance indicators that the Legislature may use to measure whether this bill meets the stated goal, purpose, and objective are the number of qualified taxpayers that excluded qualified amounts from gross income, and the aggregate amount of settlement payments arising out of the 2020 Bobcat Fire. The Franchise Tax Board (FTB) must report this information to the Legislature on December 1, 2029, which is treated as an exception to the general prohibition against disclosure of confidential taxpayer information.
7. Provides that this bill remains in effect only until December 1, 2029, and is repealed as of that date.
8. Takes immediate effect as an urgency measure

Governor’s Veto Message

These bills would enact personal income and corporation tax exclusions for settlement payments related to specific wildfires occurring between 2020 and 2022.

I wholeheartedly support the intent of these bills. In 2022, I signed legislation that provided similar tax exclusions for settlement claims resulting from catastrophic wildfires that occurred in the preceding five years. In signing those bills, I stated future measures, like these bills, should be included as part of the annual budget process given the General Fund implications. The following year, the Legislature enacted an income tax exclusion for an additional wildfire in the 2023-24 Budget Act. As such, I strongly encourage the Legislature to include these proposals in next year's budget framework.

In partnership with the Legislature this year, my Administration has enacted a balanced budget that avoids deep program cuts to vital services and protected investments in education, health care, climate, public safety, housing, and social service programs that millions of Californians rely on. It is important to remain disciplined when considering bills with significant fiscal implications that are not included in the budget, such as this measure.

COMMENTS

California wildfires: California has seen a sharp increase in the severity and frequency of wildfires in the last two decades. According to the California Department of Forestry and Fire protection, 15 of the 20 most destructive wildfires in California's history have occurred in the last decade. Additionally, eight of those 20 most destructive wildfires have been attributed to faulty power lines or electrical equipment.

The Bobcat Fire, ignited in early September 2020, and was fully contained by late November. The fire burned 115,997 acres before containment and the projected loss from the fire is equivalent to $119 million in 2024. In December 2023, the Los Angeles County Office of the County Counsel released a statement confirming that the County had agreed to settle a lawsuit filed against SCE for $80 million, despite SCE denying any liability or responsibility for the fire or any resulting damages.

Treatment of settlement awards: Generally, federal and state law allow for the exclusion from gross income of amounts received in a settlement, other than punitive damages, which result from personal physical injuries or physical sickness. Amounts resulting from emotional distress, however, are included when calculating gross income unless the emotional distress is the result of physical injury or sickness. Additionally, federal and state law generally require inclusion of attorney's fees resulting from a settlement in the calculation of gross income. Payments received as a reimbursement of costs are excluded from gross income; however, to the extent that any settlement payment exceeds costs paid or incurred in connection with the event that caused the settlement, those amounts may be taxable income. Therefore, some portions of the disbursements issued from qualifying settlements may be included in gross income. This bill excludes from gross income all amounts received in settlements resulting from the 2020 Bobcat Fire.

Tax treatment of federal disaster areas: Federal and state law allow a deduction of losses sustained in federally declared disaster areas. The Bobcat Fire was declared major disasters by the federal government, and unreimbursed losses sustained as a result of that fire are eligible to be deducted by taxpayers. Generally, higher income taxpayers derive a greater benefit from deductions. In addition to the deduction of qualified losses, taxpayers may exclude from gross income amounts of disaster relief payments issued for areas subject to a federally declared disaster. This bill excludes from gross income any amounts received by a qualified taxpayer as settlement related to the 2020 Bobcat Fire.

According to the Author

The author has provided the following statement in support of this bill:

By passing AB 1973, we cannot only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire, but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.

Arguments in Support

None on file

Arguments in Opposition

None on file

FISCAL COMMENTS

In its analysis of this bill, the Senate Appropriations Committee states, in part, "The FTB estimates that for every $50 million in qualified settlement income received, the General Fund revenue loss would be $2.5 million. FTB's costs to implement the bill would be minor and absorbable."

VOTES

ASM REVENUE AND TAXATION: 7-0-0

YES: Irwin, Ta, Bains, Gipson, Grayson, Jim Patterson, Luz Rivas

ASM APPROPRIATIONS: 15-0-0

YES: Wicks, Sanchez, Arambula, Bryan, Calderon, Wendy Carrillo, Dixon, Mike Fong, Grayson, Haney, Hart, Jim Patterson, Pellerin, Ta, Villapudua

ASSEMBLY FLOOR: 70-0-10

YES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Flora, Mike Fong, Vince Fong, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

ABS, ABST OR NV: Bonta, Cervantes, Megan Dahle, Friedman, Gabriel, Holden, Jones-Sawyer, Mathis, McKinnor, Luz Rivas

SENATE FLOOR: 39-0-1

YES: Allen, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

ABS, ABST OR NV: Alvarado-Gil

UPDATED

VERSION: August 31, 2024

CONSULTANT: Harrison Bowlby / REV. & TAX. / (916) 319-2098 FN: 0005191

 THIRD READING  

Bill No: AB 1973

Author: Lackey (R), et al.

Amended: 4/18/24 in Assembly

Vote: 27 - Urgency

SENATE REVENUE AND TAXATION COMMITTEE: 6-0, 6/26/24

AYES: Glazer, Dahle, Ashby, Bradford, Dodd, Padilla

NO VOTE RECORDED: Skinner

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/15/24

AYES: Caballero, Jones, Ashby, Becker, Bradford, Seyarto, Wahab

ASSEMBLY FLOOR: 70-0, 5/21/24 - See last page for vote

SUBJECT: Personal Income Tax Law: Corporation Tax Law: Bobcat Fire: exclusions

SOURCE: Author

DIGEST:

This bill enacts Personal Income and Corporation Tax exclusions for any amount a qualified taxpayer receives from settlement payments from Southern California Edison or its subsidiary for the 2020 Bobcat Fire for taxable years beginning on or after January 1, 2024, and before January 1, 2029.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions.
2. Includes, conformity with federal law, as gross income all income from any source, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded.
3. Excludes from gross income amounts received as a gift or inheritance, certain compensation for injuries and sickness, qualified scholarships, educational assistance programs, foster care payments, and interest received on certain state or federal obligations.
4. Excludes from gross income amounts received in a settlement, other than punitive damages, which result from personal physical injuries or physical sickness.
5. Excludes from gross income payments received as a reimbursement of costs, such as insurance payments to rebuild a destroyed home, but includes amounts resulting from emotional distress when calculating gross income, unless the emotional distress is the result of physical injury or sickness.
6. Excludes from gross income disaster victim’s settlement payments to replace property damaged or destroyed by to specific wildfire events, namely: 2015 Butte Fire, 2017 North Bay Fire, 2018 Camp Fire (AB 1249, Gallagher, Chapter 749, Statutes of 2022); 2017 Thomas Fire and 2018 Woolsey Fire (SB 1246 Stern, Chapter 841, Statutes of 2022); and 2019 Kincade Fire, and 2020 Zogg Fire. (SB 131 Committee on Budget and Fiscal Review, Chapter 55, Statutes of 2023).
7. Does not specifically exclude from gross income amounts received from previous or future fire settlement payments not specifically identified in statute.

This bill:

1. Excludes from gross income under the Personal Income and Corporation Taxes any amount received from a settlement entity related to the 2020 Bobcat Fire.
2. Applies to taxable years beginning on or after January 1, 2024, and before January 1, 2029.
3. Defines “Settlement entity” as Southern California Edison or its subsidiary making a settlement payment to a qualified taxpayer.
4. Defines “Qualified taxpayer” to mean any taxpayer who owned real property located in, resided within, or had a place of business within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
5. Requires the settlement entity to provide, upon request by the Franchise Tax Board (FTB), documentation of the settlement payments.
6. Contains legislative findings and declarations to comply with Section 41 of the Revenue and Taxation Code.
7. Contains an urgency clause.

Background

2020 Bobcat Fire. The Bobcat Fire of 2020 was the largest wildfire in Los Angeles County history. According to Cal Fire’s Wildfire Activity Statistics, the fire began on September 6, 2020, and continued until November 30, 2020. The fire burned 115,997 acres, damaged 47structures (including 28 homes), and destroyed 169 structures (including 87 residences). The fire was allegedly caused by tree branches that came in contact with an SCE overhead conductor. The federal government filed a lawsuit accusing SCE and its contractor of failing to properly maintain trees that came into contact with the conductors, thereby sparking the 2020 Bobcat Fire. The lawsuit seeks $121 million in damages for the cost of extinguishing the blaze and the resulting damage to property and natural resources. Additionally, Los Angeles negotiated a settlement for over $80 million from SCE for damages related to the Bobcat Fire. Further, more than 150 fire victims have jointly sued SCE seeking damages, stating that the power company’s negligence caused the fire that burned more than 115,000 acres, destroyed over 170 structures, and resulted in multiple injuries.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, the FTB estimates that for every $50 million in qualified settlement income received, the General Fund revenue loss would be $2.5 million. FTB’s costs to implement the bill would be minor and absorbable.

SUPPORT: (Verified 8/14/24)

Howard Jarvis Taxpayers Association

OPPOSITION: (Verified 8/14/24)

None received

ARGUMENTS IN SUPPORT: According to the author, “By passing AB 1973, we can not only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.”

ASSEMBLY FLOOR: 70-0, 5/21/24

AYES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Flora, Mike Fong, Vince Fong, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NO VOTE RECORDED: Bonta, Cervantes, Megan Dahle, Friedman, Gabriel, Holden, Jones-Sawyer, Mathis, McKinnor, Luz Rivas

Prepared by: Haley Summers / REV. & TAX. / (916) 651-4117

8/18/24 8:51:118/18/24 8:51:11

**** END ****

SENATE COMMITTEE ON

Senator Anna Caballero, Chair

2023 - 2024 Regular Session

AB 1973 (Lackey) - Personal Income Tax Law: Corporation Tax Law: Bobcat Fire: exclusions

Bill Summary:

AB 1973 would enact Personal Income and Corporation Tax exclusions for any amount a qualified taxpayer receives from settlement payments from Southern California Edison (SCE) or its subsidiary for the 2020 Bobcat Fire, as specified.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that for every $50 million in qualified settlement income received, the General Fund revenue loss would be $2.5 million. FTB’s costs to implement the bill would be minor and absorbable.

Background:

Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently exceed $87 billion annually.

Federal and state law generally allows taxpayers to exclude income from settlements from gross income if the amount received resulted from a personal physical injury or physical sickness. Additionally, payments received as a reimbursement of costs, such as those paid to rebuild a destroyed home, are excluded from gross income. However, amounts resulting from emotional distress are included when calculating gross income, unless the emotional distress is the result of physical injury or sickness. In some cases, federal and state law requires inclusion of attorney's fees resulting from a settlement in the calculation of gross income. To the extent that any settlement payment exceeds costs incurred or paid in connection with the event that caused the settlement, that income may be taxable.

The 2020 Bobcat Fire was the largest wildfire in the history of Los Angeles County. The fire burned 116,000 acres, damaged 47 structures (including 28 homes), and destroyed 169 structures (including 87 residences). The fire was allegedly caused by tree branches that came in contact with an SCE overhead conductor. The federal government filed a lawsuit accusing SCE and its contractor of failing to properly maintain trees that came into contact with the conductors, thereby sparking the 2020 Bobcat Fire. The lawsuit sought $121 million in damages for the cost of extinguishing the blaze and the resulting damage to property and natural resources.

The Legislature has, in recent years, enacted personal income and corporation tax exclusions when disaster victims receive settlement payments to replace property damaged or destroyed by specific wildfire events, including:

• AB 1249 (Gallagher, 2022) which pertained to amounts received by a qualified taxpayer in settlement from Pacific Gas & Electric related to the 2015 Butte, 2017 North Bay, and 2018 Camp Fires.
• SB 1246 (Stern, 2022), which applied to pertained received by a qualified taxpayer in settlement from SCE related to the 2017 Thomas Fire and the 2018 Woolsey Fire.
• SB 131 (Committee on Budget & Fiscal Review, 2023) which pertained to amounts received in settlements by a qualified taxpayer associated with either the 2019 Kincade Fire in Sonoma County, or the 2020 Zogg Fire in Tehama and Shasta Counties.

However, some victims of other previous wildfires not specified in these bills who receive settlement payments may not be able to exclude them from taxable income for state purposes. Additionally, any victims of future wildfires receiving settlement payments may have to do so absent legislation.

Proposed Law:

This bill would, for taxable years 2024 through 2028, enact Personal Income and Corporation Tax exclusions when a qualified taxpayer receives a qualified amount from a settlement entity in connection with the 2020 Bobcat Fire.

Related Legislation:

• AB 294 (Petri-Norris) would have provided a qualified taxpayer an exclusion from gross income for amounts received from a settlement entity for a wildfire. The bill held under submission on the Suspense File of the Assembly Appropriations Committee.
• SB 542 (Dahle) would provide a qualified taxpayer an exclusion from gross income for amounts received from a settlement entity to replace property damaged or destroyed in connection with the 2021 Dixie Fire or the 2022 Mill Fire. This bill is currently pending in the Assembly Appropriations Committee.
• SB 952 (Dahle) would allow two home fire safety tax credits for qualified home hardening and qualified vegetation management, collectively known as the Fire Safe Home Tax Credits Act. The bill was held under submission on the Suspense File of this Committee.
• SB 927 (Dahle) would provide a qualified taxpayer an exclusion from gross income for qualified amounts received from a settlement entity to replace property damaged or destroyed in a natural disaster declared a state of emergency by the Governor and the President of the United States. The bill was held under submission on the Suspense File of this Committee.
• SB 1004 (Wilk, 2023/2024) would provide a qualified taxpayer an exclusion from gross income for amounts received from a settlement entity for a wildfire. This bill is currently pending in the Assembly Appropriations Committee.
• SB 131 (Committee on Budget and Fiscal Review, Chapter 55, Statutes of 2023) among other things provides an exclusion from gross income for amounts received for settlement payments as a result of the 2019 Kincade Fire and 2020 Zogg fire.
• AB 1249 (Gallagher, Chapter 749, Statutes of 2022) provides an exclusion from gross income for amounts received in settlement under the order of the United States Bankruptcy Court for the Northern District of California dated June 20, 2020, case number 19-30088, docket number 8053.
• SB 1246 (Stern, Chapter 841, Statutes of 2022) provides an exclusion from gross income for amounts received from Southern California Edison in settlement for claims relating to the 2017 Thomas Fire or the 2018 Woolsey Fire and allow refunds of tax previously paid on those amounts.

Staff Comments:

FTB notes that, to determine the magnitude of the bill’s potential revenue loss, both the number of qualifying residential property owners and the amount of funds received from Bobcat Fire settlements must be known. Because it is difficult to predict both, FTB indicates that the revenue impact to the General Fund is unknown. However, using an average tax rate of 5 percent, FTB assumes that for every $50 million in qualified settlement income received, the estimated revenue loss would be $2.5 million.

-- END --

SENATE COMMITTEE ON REVENUE AND TAXATION

Senator Steven Glazer, Chair

2023 - 2024 Regular

Personal Income Tax Law: Corporation Tax Law: Bobcat Fire: exclusions

Enacts Personal Income and Corporation Tax exclusions for any amount a qualified taxpayer receives from settlement payments from Southern California Edison or its subsidiary for the 2020 Bobcat Fire for taxable years beginning on or after January 1, 2024, and before January 1, 2029.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives to compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as participating in charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something they would not otherwise do. The Department of Finance is required annually to publish a list of state tax expenditures, currently totaling around $87 billion per year.

Income. Existing federal and state laws provide that gross income includes all income from any source, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded. Existing federal and state laws provide that certain types of income are excluded from gross income, such as amounts received as a gift or inheritance, certain compensation for injuries and sickness, qualified scholarships, educational assistance programs, foster care payments, and interest received on certain state or federal obligations.

Treatment of settlement awards. Generally, federal and state law allows taxpayers to exclude income from settlements from gross income if the amount received resulted from a personal physical injury or physical sickness unless it is punitive damages. Additionally, payments received as a reimbursement of costs, such as those paid to rebuild a destroyed home, are excluded from gross income. However, amounts resulting from emotional distress are included when calculating gross income unless the emotional distress is the result of physical injury or sickness. In some cases, federal and state law requires including attorney's fees resulting from a settlement in the gross income calculation. To the extent that any settlement payment exceeds costs incurred or paid in connection with the event that caused the settlement, that income may be taxable.

California Fires. Over the last decade, California has experienced increased, intense, and record-breaking wildfires. These fires have resulted in a devastating loss of life and billions of dollars in damage to property and infrastructure. Fires attributed to power lines and electrical equipment comprise nine of California's 20 most destructive fires. According to the California Department of Forestry and Fire Protection (Cal Fire), in 2023 alone, there were 594,971 emergency responses, 7,127 wildfires, 324,917 acres burned, one civilian fatality, three firefighter fatalities, 58 structures destroyed, and 13 structures damaged.

Investor-owned utilities in California have faced significant scrutiny and legal consequences for their roles in various wildfire incidents – Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) have both been found liable for fires sparked by their equipment. These incidents have led to substantial financial settlements intended to compensate victims and cover damages caused by the fires.

Fire disaster tax relief. In recent years, the Legislature has enacted Personal Income and Corporation Tax exclusions when fire victims receive settlement payments to replace property damaged or destroyed by specific wildfire events, including:

• AB 1249 (Gallagher, 2022) applied to amounts received by a qualified taxpayer in settlement from PG&E related to the 2015 Butte, 2017 North Bay, and 2018 Camp Fires.
• SB 1246 (Stern, 2022) applied to amounts received by a qualified taxpayer in settlement from SCE related to the 2017 Thomas Fire and the 2018 Woolsey Fire.
• SB 131 (Committee on Budget & Fiscal Review, 2023) applied to amounts received in settlements from PG&E by a qualified taxpayer associated with either the 2019 Kincade Fire in the County of Sonoma or the 2020 Zogg Fire in Tehama and Shasta counties.

Victims of wildfires not specified in these bills who receive settlement payments may be unable to exclude those payments from their state taxable income unless and until the Legislature enacts a bill allowing them to do so.

2020 Bobcat Fire. The Bobcat Fire of 2020 was the largest wildfire in Los Angeles County history. According to Cal Fire’s Wildfire Activity Statistics, the fire began on September 6, 2020, and continued until November 30, 2020. The fire burned 115,997 acres, damaged 47 structures (including 28 homes), and destroyed 169 structures (including 87 residences). The fire was allegedly caused by tree branches that came in contact with an SCE overhead conductor. The federal government filed a lawsuit accusing SCE and its contractor of failing to properly maintain trees that came into contact with the conductors, thereby sparking the 2020 Bobcat Fire. The lawsuit sought $121 million in damages for the cost of extinguishing the blaze and the resulting damage to property and natural resources.

The author wants to enact income exclusions for taxpayers receiving settlement payments relating to the 2020 Bobcat Fire from SCE or its subsidiary.

Proposed Law

Assembly Bill 1973 enacts Personal Income and Corporation Tax exclusions when a qualified taxpayer receives a qualified amount from a settlement entity. The measure applies to taxable years beginning on or after January 1, 2024, and before January 1, 2029.

The bill:

• Defines “qualified amount” as any amount received in settlement by a qualified taxpayer from a settlement entity in connection with the 2020 Bobcat Fire.
• Defines “Qualified taxpayer” to mean any taxpayer who owned real property located in, resided within, or had a place of business within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
• Defines “Settlement entity” as SCE or its subsidiary making a settlement payment to a qualified taxpayer.
• Requires the settlement entity to provide, upon request by the Franchise Tax Board (FTB), documentation of the settlement payments.
• Contains legislative findings and declarations to comply with Section 41 of the Revenue and Taxation Code.
• Contains an urgency clause.

State Revenue Impact

According to FTB, predicting the amount and timing of settlement payouts is difficult. Therefore, the revenue impact on the General Fund is unknown. However, it is assumed that for every $50 million in qualified settlement amounts received, and applying an average tax rate of 5%, the estimated revenue loss would be approximately $2.5 million.

Comments

1. Purpose of the bill. According to the author, “By passing AB 1973, we can not only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.”
   
2. Revenue loss. Existing tax law provides various credits, deductions, exclusions, and exemptions for certain taxpayers. Since these items are enacted to accomplish some governmental purpose and determined to have a cost — in the form of foregone revenues — state law refers to them as "tax expenditures." This bill would create a new tax expenditure, costing the General Fund in foregone revenue. As a result, the state will have to reduce spending or increase taxes to account for the foregone revenue.
   
3. Tax treatment of federal disaster areas. Federal and state law allow a deduction of losses sustained in federally declared disaster areas against gross income. The Bobcat Fire was declared a major disaster by the federal government. Therefore, taxpayers can deduct unreimbursed losses sustained due to that fire on their federal and state income tax forms. Additionally, taxpayers may exclude from gross income any disaster relief payments that may have been issued for living in a federally declared disaster area. California conforms to federal law’s exclusions of these forms of payments, and AB 1973 would additionally authorize an exclusion from gross income any settlement payment received by a qualified taxpayer related to the 2020 Bobcat Fire.
   
4. No conformity. While following several precedents in state law, this bill creates an income exclusion for settlement payments pertaining to the 2020 Bobcat Fire that is not allowed for federal taxes unless and until Congress acts to enact a similar exclusion. As a result, taxpayers may have to include the same income for federal purposes that they would exclude for state purposes, which can create confusion for taxpayers. However, currently pending in the United States Congress is HR 7024. If enacted, HR 7024 would provide an exemption from federal income taxes for all wildfire relief payments. Until the federal government enacts such legislation, state income exclusions for wildfires will not conform to federal law.
   
5. Related legislation. Earlier this year, the Committee approved three other measures that are similar to AB 1973:
   
   • SB 927 (Dahle) enacts similar exclusions when taxpayers receive settlement payments due to any natural disaster, not just a wildfire, that both the Governor and the President of the United States declare a state of emergency. This bill was held on the Senate Appropriations Committee’s suspense file.
   • SB 1004 (Wilk) enacts Personal Income and Corporation Tax exclusions for amounts received in settlement by a taxpayer to replace property damaged or destroyed by wildfire. This Senate approved the measure, which is currently pending in the Assembly Revenue & Taxation Committee.
   • SB 1102 (Nguyen) enacts a Personal Income and Corporation Tax exclusion for settlement amounts received by qualified taxpayers from defendants in settlement for claims relating to the October 2, 2021, oil spill off the coast of the County of Orange near the City of Huntington Beach. This bill was held on the Senate Appropriations Committee’s suspense file.
     
6. Section 41. Section 41 of the Revenue and Taxation Code requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators, and data collection and reporting requirements (SB 1335, Leno, 2014). To satisfy these requirements, AB 1973 states:

• Its goal, purpose, and objective is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from the devastating 2020 Bobcat Fire.
• The performance indicators shall be the number of qualified taxpayers that excluded qualified amounts from gross income and the aggregate settlement payments arising from the 2020 Bobcat Fire.
• The bill then directs FTB to provide a written report to the Legislature on December 1, 2029, to the extent feasible, on information regarding the performance indicators.

1. Urgency. As an urgency statute, AB 1973 must be approved by a 2/3 vote of each house of the Legislature. Regular legislation takes effect on January 1 following its passage, but urgency bills take effect as soon as they are passed, signed, and chaptered.

Assembly Actions

Assembly Revenue & Taxation Committee: 7-0
Assembly Appropriations Committee: 15-0
Assembly Floor: 70-0

Support and Opposition

(6/21/24)

Support: Howard Jarvis Taxpayers Association (HJTA)

Opposition: None submitted.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1973

Author:(Lackey)

As Amended Ver:April 18, 2024

2/3 vote. Urgency

SUMMARY

Excludes from gross income amounts received in settlement arising out of the 2020 Bobcat Fire, as provided.

Major Provisions

1. Excludes, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, any "qualified amount" received by a "qualified taxpayer," for taxable years beginning on or after January 1, 2024, and before January 1, 2029.
2. Defines a "qualified amount" as any amount received in settlement by a "qualified taxpayer" from a "settlement entity" in connection with the 2020 Bobcat Fire.
3. Defines a "qualified taxpayer" as:
   1. Any taxpayer that owned real property located in the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire; or,
   2. Any taxpayer that had a place of business within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
4. Provides that, for this bill's exclusion under the PIT Law, a "qualified taxpayer" includes any taxpayer that resided within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
5. Defines a "settlement entity" as Southern California Edison (SCE) or its subsidiary.
6. Finds and declares, for the purposes of complying with Revenue and Taxation Code Section 41, that the goal, purpose, and objective of this bill is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from the devastating 2020 Bobcat Fire. The performance indicators that the Legislature may use to measure whether this bill meets the stated goal, purpose, and objective are the number of qualified taxpayers that excluded qualified amounts from gross income, and the aggregate amount of settlement payments arising out of the 2020 Bobcat Fire. The Franchise Tax Board (FTB) must report this information to the Legislature on December 1, 2029, which is treated as an exception to the general prohibition against disclosure of confidential taxpayer information.
7. Provides that this bill remains in effect only until December 1, 2029, and is repealed as of that date.
8. Takes immediate effect as an urgency measure.

COMMENTS

1. California wildfires: California has seen a sharp increase in the severity and frequency of wildfires in the last two decades. According to the California Department of Forestry and Fire protection, 15 of the 20 most destructive wildfires in California's history have occurred in the last decade. Additionally, eight of those 20 most destructive wildfires have been attributed to faulty power lines or electrical equipment.

The Bobcat Fire, ignited in early September 2020, and was fully contained by late November. The fire burned 115,997 acres before containment and the projected loss from the fire is equivalent to $119 million in 2024. In December 2023, the Los Angeles County Office of the County Counsel released a statement confirming that the County had agreed to settle a lawsuit filed against SCE for $80 million, despite SCE denying any liability or responsibility for the fire or any resulting damages.

1. Treatment of settlement awards: Generally, federal and state law allow for the exclusion from gross income of amounts received in a settlement, other than punitive damages, which result from personal physical injuries or physical sickness. Amounts resulting from emotional distress, however, are included when calculating gross income unless the emotional distress is the result of physical injury or sickness. Additionally, federal and state law generally require inclusion of attorney's fees resulting from a settlement in the calculation of gross income. Payments received as a reimbursement of costs are excluded from gross income; however, to the extent that any settlement payment exceeds costs paid or incurred in connection with the event that caused the settlement, those amounts may be taxable income. Therefore, some portions of the disbursements issued from qualifying settlements may be included in gross income. This bill excludes from gross income all amounts received in settlements resulting from the 2020 Bobcat Fire.
2. Tax treatment of federal disaster areas: Federal and state law allow a deduction of losses sustained in federally declared disaster areas. The Bobcat Fire was declared major disasters by the federal government, and unreimbursed losses sustained as a result of that fire are eligible to be deducted by taxpayers. Generally, higher income taxpayers derive a greater benefit from deductions. In addition to the deduction of qualified losses, taxpayers may exclude from gross income amounts of disaster relief payments issued for areas subject to a federally declared disaster. This bill excludes from gross income any amounts received by a qualified taxpayer as settlement related to the 2020 Bobcat Fire.

According to the Author

The author has provided the following statement in support of this bill:

By passing AB 1973, we cannot only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire, but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.

Arguments in Support

None on file.

Arguments in Opposition

None on file.

FISCAL COMMENTS

1. General Fund (GF) revenue loss of an unknown, but potentially significant, amount. FTB notes it does not know how many taxpayers may receive a settlement from SCE as a result of the Bobcat Fire. However, FTB assumes approximately $2.5 million in GF revenue loss for every $50 million of qualified settlement amounts (applying an average tax rate of 5%). By decreasing PIT and CT revenue, this bill also likely decreases Proposition 98 GF spending by approximately 40% of the revenue loss (the exact amount depends on the specific amount of the annual Proposition 98 guarantee).
2. Costs of an unknown, but likely absorbable, amount to FTB to administer the exclusion and provide the report.

According to the Legislative Analyst's Office, the GF faces a structural deficit in the tens of billions of dollars over the next several fiscal years.

VOTES

ASM REVENUE AND TAXATION: 7-0-0

YES: Irwin, Ta, Bains, Gipson, Grayson, Jim Patterson, Luz Rivas

ASM APPROPRIATIONS: 15-0-0

YES: Wicks, Sanchez, Arambula, Bryan, Calderon, Wendy Carrillo, Dixon, Mike Fong, Grayson, Haney, Hart, Jim Patterson, Pellerin, Ta, Villapudua

UPDATED

VERSION: April 18, 2024

CONSULTANT: Harrison Bowlby / REV. & TAX. / (916) 319-2098 FN: 0003143

Date of Hearing: May 15, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 1973

Author:(Lackey) – As Amended Ver:April 18, 2024

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill excludes from gross income, under the Personal Income Tax (PIT) Law and Corporation Tax (CT) Law, amounts received in a settlement arising out of the 2020 Bobcat Fire.

Specifically, this bill:

1. Excludes, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, from gross income an amount received in a settlement by a qualified taxpayer from a settlement entity in connection with the 2020 Bobcat Fire. A qualified taxpayer must have owned real property, resided, or had a place of business in the County of Los Angeles during the fire.
2. Requires the settlement entity – in this case, Southern California Edison (SCE) or its subsidiary – to provide, upon request of the Franchise Tax Board (FTB), documentation of the settlement payments in the form and manner requested by FTB.
3. Declares the goal and performance indicators of the new exclusion and requires, by December 1, 2029, FTB to provide a report to the Legislature with specified exclusion data.

FISCAL EFFECT:

1. General Fund (GF) revenue loss of an unknown, but potentially significant, amount. FTB notes it does not know how many taxpayers may receive a settlement from SCE as a result of the Bobcat Fire. However, FTB assumes approximately $2.5 million in GF revenue loss for every $50 million of qualified settlement amounts (applying an average tax rate of 5%). By decreasing PIT and CT revenue, this bill also likely decreases Proposition 98 GF spending by approximately 40% of the revenue loss (the exact amount depends on the specific amount of the annual Proposition 98 guarantee).
2. Costs of an unknown, but likely absorbable, amount to FTB to administer the exclusion and provide the report.

According to the Legislative Analyst’s Office, the GF faces a structural deficit in the tens of billions of dollars over the next several fiscal years.

COMMENTS:

1. Purpose. According to the author:

By passing AB 1973, we cannot only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire, but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.

This bill is supported by the Howard Jarvis Taxpayers Association.

1. Background.

Treatment of Settlement Funds. Existing federal and state laws generally exclude amounts received in a settlement from gross income. However, exceptions include punitive damages and awards resulting from emotional distress, unless the emotional distress results from physical injury or sickness. Attorney’s fees resulting from a settlement must also be included in the taxpayer’s calculation of gross income under specified circumstances.

The Bobcat Fire ignited in September 2020 and burned over 115,000 acres before being fully contained in late November 2020. Projected losses from the fire are valued at approximately $119 million. In December 2023, the Los Angeles county counsel released a statement confirming the county settled a lawsuit filed against SCE for $80 million, despite SCE denying liability or responsibility for the fire and resulting damages. This bill allows a qualified taxpayer that paid or incurred expenses due to the Bobcat Fire to exclude from gross income amounts received in settlement from SCE.

The New Normal. In 2022, two measures were signed into law to provide a similar income exclusion for specific wildfire victims. AB 1249 (Gallagher), Chapter 749, Statutes of 2022, allowed taxpayers to exclude settlement amounts received from PG&E’s Fire Victims Trust arising from the 2015 Butte Fire, 2017 North Bay Fires and 2018 Camp Fire. SB 1246 (Stern), Chapter 841, Statutes of 2022, allowed a taxpayer to exclude settlement amounts received from SCE relating to the 2017 Thomas Fire and 2018 Woolsey Fire. In signing these measures, Governor Newsom included the following signing message:

The Legislature approved these bills with an overwhelming, bipartisan vote. In signing this bill, I expect that building the associated revenue reductions of over $200 million into the budget framework is equally supported. In the future, measures such as this should be included as part of the Budget Act.

Acknowledging the Governor’s message, SB 131 (Committee on Budget and Fiscal Review), Chapter 55, Statutes of 2023, enacted two additional gross income exclusions for settlement amounts related to the 2019 Kincade Fire and 2020 Zogg Fire, which were provisions originally contained in two separate bills, SB 370 (McGuire) and SB 542 (Dahle), respectively. As a result, SB 370 was not heard by the Assembly Revenue and Taxation Committee at the request of the author. SB 542 was amended to provide a gross income exclusion for settlement amounts related to the 2021 Dixie Fire or 2022 Mill Fire, and is pending hearing in this committee.

1. Related Legislation. AB 294 (Petrie-Norris) provides a generally applicable gross income exclusion for taxpayers that received payments as part of a settlement related to a fire or natural disaster. AB 294 was held on this committee’s suspense file.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: April 29, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 1973 (

Author:Lackey) – As Amended Ver:April 18, 2024

SUSPENSE

2/3 vote. Fiscal committee.

SUBJECT: Personal Income Tax Law: Corporation Tax Law: Bobcat Fire: exclusions

SUMMARY: Excludes from gross income amounts received in settlement arising out of the 2020 Bobcat Fire, as provided. Specifically, this bill:

1. Excludes, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, any "qualified amount" received by a "qualified taxpayer," for taxable years beginning on or after January 1, 2024, and before January 1, 2029.
2. Defines a "qualified amount" as any amount received in settlement by a "qualified taxpayer" from a "settlement entity" in connection with the 2020 Bobcat Fire.
3. Defines a "qualified taxpayer" as:
   1. Any taxpayer that owned real property located in the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire; or,
   2. Any taxpayer that had a place of business within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
4. Provides that, for this bill's exclusion under the PIT Law, a "qualified taxpayer" includes any taxpayer that resided within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
5. Defines a "settlement entity" as Southern California Edison or its subsidiary.
6. Finds and declares, for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, that the goal, purpose, and objective of this bill is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from the devastating 2020 Bobcat Fire. The performance indicators that the Legislature may use to measure whether this bill meets the stated goal, purpose, and objective are the number of qualified taxpayers that excluded qualified amounts from gross income, and the aggregate amount of settlement payments arising out of the 2020 Bobcat Fire. The Franchise Tax Board (FTB) must report this information to the Legislature on December 1, 2029, which is treated as an exception to the general prohibition against disclosure of confidential taxpayer information.
7. Provides that this bill remains in effect only until December 1, 2029, and is repealed as of that date.
8. Finds and declares that this bill is necessary for the public purpose of preventing undue hardship to taxpayers who owned property, resided, or had a business in a part of California devastated by the 2020 Bobcat Fire, and does not constitute a gift of public funds, as defined.
9. Takes immediate effect as an urgency measure.

EXISTING FEDERAL LAW:

1. Provides that gross income includes all income from whatever source derived, unless specifically excluded. (Internal Revenue Code (IRC) Section 61.)
2. Excludes from gross income amounts received as a qualified disaster relief payment, as defined, in presidentially declared disaster areas. (IRC Section 139.)
3. Authorizes a deduction equal to the amount of loss attributable to a federally declared disaster, to the extent those amounts are not reimbursed from other sources. (IRC Section 165.)
4. Excludes from gross income amounts of damages, other than punitive damages, received in a settlement on account of personal physical injuries or physical sickness. (IRC Section 104.)

EXISTING STATE LAW:

1. Conforms, with certain modifications, to the federal treatment of qualified disaster payments, and settlement amounts related to personal physical injuries or sickness. (R&TC Section 17201
2. Provides a corresponding state disaster loss deduction, mirrored on the federal disaster loss deduction, for disasters in areas of the state for which the Governor has declared a state of emergency. (R&TC Section 17207.14.)
3. Excludes from gross income settlement amounts received by qualifying taxpayers resulting from specified wildfires. (R&TC Sections 17138.5, 17138.6, 24309.3, and 24309.1.)

FISCAL EFFECT: The FTB, in its analysis of this bill, notes that a definitive revenue impact is difficult to determine, but estimates that for every $50 million in qualified settlement amounts, the associated loss would be approximately $2.5 million, assuming an average tax rate of 5%. Committee staff notes that the settlement resulting from the Bobcat Fire is $80 million, and associated revenue losses would almost certainly be in excess of this Committee's Suspense File threshold.

COMMENTS:

1. The author has submitted the following statement in support of this bill:

By passing AB 1973, we cannot only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire, but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.

1. The Howard Jarvis Taxpayers Association, writing in support of this bill, notes, in part:

AB 1973 is a commonsense bill that takes a proactive approach to ensuring these victims receive their just compensation. It is also not unprecedented. A 2011 bill exempted settlements paid out from PG&E to victims of the San Bruno explosion. Further, SB 542 (Dahle), AB 294 (Petrie-Norris) and SB 370 (McGuire) from this session seek to do something similar as well as SB 1246 (Stern, Chapter 841, Statutes of 2022) and AB 1249 (Gallagher, Chapter 749, Statutes of 2022) that passed last session.

1. Committee Staff Comments:
   1. California wildfires: California has seen a sharp increase in the severity and frequency of wildfires in the last two decades. According to the California Department of Forestry and Fire protection, 15 of the 20 most destructive wildfires in California's history have occurred in the last decade. Additionally, eight of those 20 most destructive wildfires have been attributed to faulty power lines or electrical equipment.

The Bobcat Fire, ignited in early September 2020, and was fully contained by late November. The fire burned 115,997 acres before containment and the projected loss from the fire is equivalent to $119 million in 2024. In December 2023, the Los Angeles County Office of the County Counsel released a statement confirming that the County had agreed to settle a lawsuit filed against Southern California Edison (SCE) for $80 million, despite SCE denying any liability or responsibility for the fire or any resulting damages.

• 1. Treatment of settlement awards: Generally, federal and state law allow for the exclusion from gross income of amounts received in a settlement, other than punitive damages, which result from personal physical injuries or physical sickness. Amounts resulting from emotional distress, however, are included when calculating gross income unless the emotional distress is the result of physical injury or sickness. Additionally, federal and state law generally require inclusion of attorney's fees resulting from a settlement in the calculation of gross income. Payments received as a reimbursement of costs are excluded from gross income; however, to the extent that any settlement payment exceeds costs paid or incurred in connection with the event that caused the settlement, those amounts may be taxable income. Therefore, some portions of the disbursements issued from qualifying settlements may be included in gross income. This bill excludes from gross income all amounts received in settlements resulting from the 2020 Bobcat Fire.
  2. Tax treatment of federal disaster areas: Federal and state law allow a deduction of losses sustained in federally declared disaster areas. The Bobcat Fire was declared major disasters by the federal government, and unreimbursed losses sustained as a result of that fire are eligible to be deducted by taxpayers. Generally, higher income taxpayers derive a greater benefit from deductions. In addition to the deduction of qualified losses, taxpayers may exclude from gross income amounts of disaster relief payments issued for areas subject to a federally declared disaster. This bill excludes from gross income any amounts received by a qualified taxpayer as settlement related to the 2020 Bobcat Fire.
  3. This all seems familiar: Last Legislative Session, this Committee heard and approved AB 1249 (Gallagher), Chapter 749, Statutes of 2022, and SB 1246 (Stern), Chapter 841, Statutes of 2022, which authorized a gross income exclusion for amounts received in settlement from specified wildfires.

AB 1249 was prompted by a previous bill, AB 50 (Hill), Chapter 18, Statutes of 2011, which excluded from gross income amounts of disaster relief payments issued to victims of the San Bruno pipeline explosion. That explosion was not declared a federal disaster, and disaster relief payments received by victims could not be excluded from gross income, hence the need for AB 50. To the extent any fire or natural disaster qualifying for this bill's exclusion is declared a federal disaster area, disaster relief payments to taxpayers impacted by that fire or natural disaster would generally be excluded from gross income.

Upon signing AB 1249 and SB 1246, Governor Newsom included a message related to these bills, stating that, in part, "In signing this bill, I expect that building the associated revenue reduction of over $200 million into the budget framework is equally supported. In the future, measures such as this should be included as part of the Budget Act." Acknowledging the Governor's request, this Legislative Session the Legislature enacted two additional gross income exclusions for settlement amounts related to the 2019 Kincade Fire and the 2020 Zogg Fire by authorizing SB 131 (Committee on Budget and Fiscal Review), Chapter, Statutes of 2023. This bill incorporated the provisions of two separate bills, SB 370 (McGuire) and SB 542 (Dahle), which would have provided gross income exclusions for settlements arising out of the Kincade and Zogg fires, respectively; neither of those bills were heard by this Committee.

Last year, this Committee approved AB 294 (Petrie-Norris), that would provide a general gross income exclusion for taxpayers that received payments as part of a settlement related to a fire or natural disaster, but that bill was held on the Assembly Appropriations Committee's Suspense File.

• 1. Out of conformity: Generally, California conforms, with certain modifications, to federal tax law. Conformity promotes taxpayer compliance by reducing confusion and eases administration of tax law. This bill provides a gross income exclusion for which there is no similar provision in federal statute, thereby bringing California further out of conformity with federal law.
  2. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would authorize taxpayers to exclude amounts received in settlements related to the 2020 Bobcat Fire.
  3. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the PIT Law, the CT Law, and the Sales and Use Tax Law introduced on or after January 1, 2020. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote^[1]. Sunsets are required because eliminating a tax expenditure generally requires a 2/3 vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill complies with the requirements of R&TC Section 41 and contains an appropriate five-year sunset.
  4. Related legislation:
     1. SB 927 (Dahle) would exclude from gross income qualified amounts received in settlement to replace property damaged or destroyed in a natural disaster declared a state of emergency by the Governor and the President of the United States. SB 927 is pending hearing by the Senate Appropriations Committee.
     2. SB 131 (Committee on Budget and Fiscal Review), Chapter 55, Statutes of 2023, authorized a gross income exclusion for settlement amounts related to the Kincade and Zogg Fires.
     3. SB 370 (McGuire) would exclude from gross income settlement amounts received by a qualified taxpayer related to the Kincade Fire and authorize refunds of tax previously paid on these amounts. SB 370 was never heard by this Committee.
     4. SB 542 (Dahle) would exclude from gross income settlement amounts received by a qualified taxpayer related to the Zogg Fire. SB 542 was never heard by this Committee.
  5. Prior legislation:

1. SB 1246 (Stern), Chapter 841, Statutes of 2022, excluded from gross income, under the PIT Law and the CT Law, settlement amounts received by qualifying taxpayers related to the Thomas or Woolsey Fires.
2. AB 1249 (Gallagher), Chapter 749, Statutes of 2022, excluded from gross income, under the PIT Law and the CT Law, settlement amounts disbursed from the Fire Victims Trust to qualified taxpayers related to the Butte Fire, North Bay Fires, or the Camp Fire.
3. AB 50 (Hill), Chapter 18, Statutes of 2011, required that the 2011 San Bruno natural gas pipeline explosion be treated as a qualifying disaster for the purposes of the disaster relief payment gross income exclusion.

REGISTERED SUPPORT / OPPOSITION:

Support

Howard Jarvis Taxpayers Association

Opposition

None on file

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. An "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. ↑

Date of Hearing: April 15, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 1973 (

Author:Lackey) – As Introduced Ver:January 30, 2024

2/3 vote. Urgency. Fiscal committee.

SUBJECT: Personal Income Tax Law: Corporation Tax Law: Bobcat Fire: exclusions

SUMMARY: Excludes from gross income amounts received in settlement arising out of the 2020 Bobcat Fire, as provided. Specifically, this bill:

1. Excludes, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, any "qualified amount" received by a "qualified taxpayer," for taxable years beginning on or after January 1, 2020, and before January 1, 2029.
2. Defines a "qualified amount" as any amount received in settlement by a "qualified taxpayer" from a "settlement entity" in connection with the 2020 Bobcat Fire.
3. Defines a "qualified taxpayer" as:
   1. Any taxpayer that owned real property located in the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire; or,
   2. Any taxpayer that had a place of business within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
4. Provides that, for this bill's exclusion under the PIT Law, a "qualified taxpayer" includes any taxpayer that resided within the County of Los Angeles during the 2020 Bobcat Fire who paid or incurred expenses and received amounts from a settlement arising out of or pursuant to the 2020 Bobcat Fire.
5. Defines a "settlement entity" as the entity making the settlement payment to a qualified taxpayer.
6. Finds and declares, for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, that the goal, purpose, and objective of this bill is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from the devastating 2020 Bobcat Fire. The performance indicators that the Legislature may use to measure whether this bill meets the stated goal, purpose, and objective are the number of qualified taxpayers that excluded qualified amounts from gross income, and the aggregate amount of settlement payments arising out of the 2020 Bobcat Fire. The Franchise Tax Board (FTB) must report this information to the Legislature on December 1, 2029, which is treated as an exception to the general prohibition against disclosure of confidential taxpayer information.
7. Provides that this bill remains in effect only until December 1, 2029, and is repealed as of that date.
8. Finds and declares that this bill is necessary for the public purpose of preventing undue hardship to taxpayers who owned property, resided, or had a business in a part of California devastated by the 2020 Bobcat Fire, and does not constitute a gift of public funds, as defined.
9. Takes immediate effect as an urgency measure.

EXISTING FEDERAL LAW:

1. Provides that gross income includes all income from whatever source derived, unless specifically excluded. (Internal Revenue Code (IRC) Section 61.)
2. Excludes from gross income amounts received as a qualified disaster relief payment, as defined, in presidentially declared disaster areas. (IRC Section 139.)
3. Authorizes a deduction equal to the amount of loss attributable to a federally declared disaster, to the extent those amounts are not reimbursed from other sources. (IRC Section 165.)
4. Excludes from gross income amounts of damages, other than punitive damages, received in a settlement on account of personal physical injuries or physical sickness. (IRC Section 104.)

EXISTING STATE LAW:

1. Conforms, with certain modifications, to the federal treatment of qualified disaster payments, and settlement amounts related to personal physical injuries or sickness. (R&TC Section 17201
2. Provides a corresponding state disaster loss deduction, mirrored on the federal disaster loss deduction, for disasters in areas of the state for which the Governor has declared a state of emergency. (R&TC Section 17207.14.)
3. Excludes from gross income settlement amounts received by qualifying taxpayers resulting from specified wildfires. (R&TC Sections 17138.5, 17138.6, 24309.3, and 24309.1.)

FISCAL EFFECT: The FTB, in its analysis of this bill, notes that a definitive revenue impact is difficult to determine, but estimates that for every $50 million in qualified settlement amounts, the associated loss would be approximately $2.5 million, assuming an average tax rate of 5%. Committee staff notes that the settlement resulting from the Bobcat Fire is $80 million, and associated revenue losses would almost certainly be in excess of this Committee's Suspense File threshold.

COMMENTS:

1. The author has submitted the following statement in support of this bill:

By passing AB 1973, we cannot only provide much-needed financial relief to those who have lost their homes and businesses in the Bobcat Fire, but also reaffirm our commitment to standing with communities in their darkest hours. We must help alleviate the burdens on those already grappling with the aftermath of a natural disaster.

1. The Howard Jarvis Taxpayers Association, writing in support of this bill, notes, in part:

AB 1973 is a commonsense bill that takes a proactive approach to ensuring these victims receive their just compensation. It is also not unprecedented. A 2011 bill exempted settlements paid out from PG&E to victims of the San Bruno explosion. Further, SB 542 (Dahle), AB 294 (Petrie-Norris) and SB 370 (McGuire) from this session seek to do something similar as well as SB 1246 (Stern, Chapter 841, Statutes of 2022) and AB 1249 (Gallagher, Chapter 749, Statutes of 2022) that passed last session.

1. Committee Staff Comments:
   1. California wildfires: California has seen a sharp increase in the severity and frequency of wildfires in the last two decades. According to the California Department of Forestry and Fire protection, 15 of the 20 most destructive wildfires in California's history have occurred in the last decade. Additionally, eight of those 20 most destructive wildfires have been attributed to faulty power lines or electrical equipment.

The Bobcat Fire, ignited in early September 2020, and was fully contained by late November. The fire burned 115,997 acres before containment and the projected loss from the fire is equivalent to $119 million in 2024. In December 2023, the Los Angeles County Office of the County Counsel released a statement confirming that the County had agreed to settle a lawsuit filed against Southern California Edison (SCE) for $80 million, despite SCE denying any liability or responsibility for the fire or any resulting damages.

• 1. Treatment of settlement awards: Generally, federal and state law allow for the exclusion from gross income of amounts received in a settlement, other than punitive damages, which result from personal physical injuries or physical sickness. Amounts resulting from emotional distress, however, are included when calculating gross income unless the emotional distress is the result of physical injury or sickness. Additionally, federal and state law generally require inclusion of attorney's fees resulting from a settlement in the calculation of gross income. Payments received as a reimbursement of costs are excluded from gross income; however, to the extent that any settlement payment exceeds costs paid or incurred in connection with the event that caused the settlement, those amounts may be taxable income. Therefore, some portions of the disbursements issued from qualifying settlements may be included in gross income. This bill excludes from gross income all amounts received in settlements resulting from the 2020 Bobcat Fire.
  2. Tax treatment of federal disaster areas: Federal and state law allow a deduction of losses sustained in federally declared disaster areas. The Bobcat Fire was declared major disasters by the federal government, and unreimbursed losses sustained as a result of that fire are eligible to be deducted by taxpayers. Generally, higher income taxpayers derive a greater benefit from deductions. In addition to the deduction of qualified losses, taxpayers may exclude from gross income amounts of disaster relief payments issued for areas subject to a federally declared disaster. This bill excludes from gross income any amounts received by a qualified taxpayer as settlement related to the 2020 Bobcat Fire.
  3. This all seems familiar: Last Legislative Session, this Committee heard and approved AB 1249 (Gallagher), Chapter 749, Statutes of 2022, and SB 1246 (Stern), Chapter 841, Statutes of 2022, which authorized a gross income exclusion for amounts received in settlement from specified wildfires.

AB 1249 was prompted by a previous bill, AB 50 (Hill), Chapter 18, Statutes of 2011, which excluded from gross income amounts of disaster relief payments issued to victims of the San Bruno pipeline explosion. That explosion was not declared a federal disaster, and disaster relief payments received by victims could not be excluded from gross income, hence the need for AB 50. To the extent any fire or natural disaster qualifying for this bill's exclusion is declared a federal disaster area, disaster relief payments to taxpayers impacted by that fire or natural disaster would generally be excluded from gross income.

Upon signing AB 1249 and SB 1246, Governor Newsom included a message related to these bills, stating that, in part, "In signing this bill, I expect that building the associated revenue reduction of over $200 million into the budget framework is equally supported. In the future, measures such as this should be included as part of the Budget Act." Acknowledging the Governor's request, this Legislative Session the Legislature enacted two additional gross income exclusions for settlement amounts related to the 2019 Kincade Fire and the 2020 Zogg Fire by authorizing SB 131 (Committee on Budget and Fiscal Review), Chapter, Statutes of 2023. This bill incorporated the provisions of two separate bills, SB 370 (McGuire) and SB 542 (Dahle), which would have provided gross income exclusions for settlements arising out of the Kincade and Zogg fires, respectively; neither of those bills were heard by this Committee.

Last year, this Committee approved AB 294 (Petrie-Norris), that would provide a general gross income exclusion for taxpayers that received payments as part of a settlement related to a fire or natural disaster, but that bill was held on the Assembly Appropriations Committee's Suspense File.

• 1. Out of conformity: Generally, California conforms, with certain modifications, to federal tax law. Conformity promotes taxpayer compliance by reducing confusion and eases administration of tax law. This bill provides a gross income exclusion for which there is no similar provision in federal statute, thereby bringing California further out of conformity with federal law.
  2. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would authorize taxpayers to exclude amounts received in settlements related to the 2020 Bobcat Fire.
  3. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the PIT Law, the CT Law, and the Sales and Use Tax Law introduced on or after January 1, 2020. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote^[1]. Sunsets are required because eliminating a tax expenditure generally requires a 2/3^rd vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill complies with the requirements of R&TC Section 41, but does not contain an appropriate five-year sunset.
  4. Suggested Committee amendments: As currently drafted, this bill does not specify a particular settlement entity. Given the County of Los Angeles has confirmed its settling of its lawsuit against SCE, the author and Committee should amend this bill to define the "settlement entity" as SCE. Additionally, this bill provides for a nine-year, rather than five-year, sunset date, in violation of this Committee's rules. This bill should be amended to provide that this bill applies to taxable years beginning on or after January 1, 2024, and before January 1, 2029.
  5. FTB technical consideration: The FTB, in its analysis of this bill, suggests removing the phrase "or pursuant to" on Page 2, Lines 14, 17, and 22, and on Page 3, Lines 36 and 40. The author and Committee should consider this suggestion.
  6. Related legislation:
     1. SB 927 (Dahle) would exclude from gross income qualified amounts received in settlement to replace property damaged or destroyed in a natural disaster declared a state of emergency by the Governor and the President of the United States. SB 927 is pending hearing by the Senate Appropriations Committee.
     2. SB 131 (Committee on Budget and Fiscal Review), Chapter 55, Statutes of 2023, authorized a gross income exclusion for settlement amounts related to the Kincade and Zogg Fires.
     3. SB 370 (McGuire) would exclude from gross income settlement amounts received by a qualified taxpayer related to the Kincade Fire and authorize refunds of tax previously paid on these amounts. SB 370 was never heard by this Committee.
     4. SB 542 (Dahle) would exclude from gross income settlement amounts received by a qualified taxpayer related to the Zogg Fire. SB 542 was never heard by this Committee.
  7. Prior legislation:

1. SB 1246 (Stern), Chapter 841, Statutes of 2022, excluded from gross income, under the PIT Law and the CT Law, settlement amounts received by qualifying taxpayers related to the Thomas or Woolsey Fires.
2. AB 1249 (Gallagher), Chapter 749, Statutes of 2022, excluded from gross income, under the PIT Law and the CT Law, settlement amounts disbursed from the Fire Victims Trust to qualified taxpayers related to the Butte Fire, North Bay Fires, or the Camp Fire.
3. AB 50 (Hill), Chapter 18, Statutes of 2011, required that the 2011 San Bruno natural gas pipeline explosion be treated as a qualifying disaster for the purposes of the disaster relief payment gross income exclusion.

REGISTERED SUPPORT / OPPOSITION:

Support

Howard Jarvis Taxpayers Association

Opposition

None on file

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. An "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. ↑