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, for taxable years beginning on or after January 1, 2020, 2024, and before January 1, 2034, 2029, would provide an exclusion from gross income for any qualified taxpayer, as defined, for amounts received for costs and losses associated with wildfires, 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 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, for taxable years beginning on or after January 1, 2020, and before January 1, 2034, would provide an exclusion from gross income for any qualified taxpayer, as defined, for amounts received for costs and losses associated with wildfires, 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 make findings and declarations related to a gift of public funds.

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, for taxable years beginning on or after January 1, 2020, would provide an exclusion from gross income for any qualified taxpayer, as defined, for amounts received for costs and losses associated with wildfires, 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 make findings and declarations related to a gift of public funds.

Date of Hearing: August 7, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

SBPCA Bill Id:SB 1004

Author:(Wilk) – As Amended Ver:June 26, 2024

Urgency: No 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 to replace property damaged or destroyed by a wildfire.

Specifically, this bill:

1. For taxable years beginning on or after January 1, 2024, and before January 1, 2029, excludes from gross income an amount received in a settlement by a qualified taxpayer that owns real property, resides, or has a place of business within an area damaged by a wildfire.
2. Defines a “settlement entity” as the entity approved by a class action settlement administrator making the settlement payment to the qualified taxpayer, and requires the settlement entity to provide documentation of the settlement payments upon request of the Franchise Tax Board (FTB) or the qualified taxpayer.
3. Declares the purpose of the new exclusion and requires, by December 1, 2027, and annually thereafter, 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 cannot predict the frequency of wildfires nor the amount and timing of settlement payments. However, FTB assumes approximately $7 million in GF revenue loss for every $100 million of qualified settlement amounts (applying an average tax rate of 7%). 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 amount to FTB to administer the exclusion, update existing informational materials and systems, and provide the annual 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:

In 2020 the Bobcat Fire, which burned over 115,000 acres in and around my district, was determined to have been caused by a tree coming in contact with power lines. Unfortunately, any settlements my constituents receive related to this fire will not be tax free because the Bobcat Fire was not included in past legislative efforts.

All wildfire victims should be afforded the same tax relief as those affected by these previously mentioned fires. SB 1004 will ensure that all wildfire settlements are tax-free regardless of where you live.

This bill is supported by the California Apartment Association and California Forestry 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. This bill allows a qualified taxpayer to exclude from gross income amounts received in settlement to replace property damaged or destroyed by a wildfire in California. By generally excluding such compensation from a wildfire victim’s gross income, this bill creates a new tax expenditure.

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 relating to 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 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. Whereas past measures provided an exclusion for income already received from a wildfire settlement, this bill anticipates the exclusion of prospective settlement income for past or future wildfires. Past measures stemmed from wildfires declared disasters by both the federal and state governments and caused by investor-owned utilities. This bill applies to settlement amounts from any wildfire. Past measures excluded all settlement amounts from income, such as the amount received for emotional distress, whereas this bill excludes the settlement amount received to replace property damaged or destroyed by the wildfire only.

1. Related Legislation. AB 294 (Petrie-Norris) is substantially similar to this bill. AB 294 was held on this committee’s suspense file.

AB 1973 (Lackey) excludes from gross income, under the PIT Law and CT Law, amounts received in a settlement arising out of the 2020 Bobcat Fire. AB 1973 is pending hearing in the Senate Appropriations Committee.

SB 542 (Dahle) excludes from gross income, under the PIT Law and CT Law, amounts received in a settlement arising out of the 2021 Dixie Fire and 2022 Mill Fire. SB 542 is pending hearing in this committee.

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

Date of Hearing: July 1, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

SBPCA Bill Id:SB 1004

Author:(Wilk) – As Amended Ver:June 26, 2024

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 37-0

SUBJECT: Income taxes: exclusions: wildfires

SUMMARY: Excludes from a "qualified taxpayer's" gross income, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, any "qualified amount," for a specified period. Specifically, this bill:

1. Excludes from gross income any "qualified amount" received by a "qualified taxpayer," for taxable years beginning on or after January 1, 2024, and before January 1, 2029.
2. Requires, upon request, a "settlement entity" to provide documentation of the settlement payments in the form and manner requested by the Franchise Tax Board (FTB) to the FTB, or to the "qualified taxpayer" who may then provide the documentation to the FTB.
3. Defines a "qualified amount" as any amount received in settlement by a "qualified taxpayer" to replace property damaged or destroyed by a wildfire if the property damaged or destroyed is located in an area of California damaged by the wildfire.
4. Defines a "qualified taxpayer" as any taxpayer that:
   1. Owns real property located in an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire; or,
   2. Has a place of business within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
5. Provides, under the PIT Law, that a "qualified taxpayer" additionally includes any taxpayer who resides within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
6. Defines a "settlement entity" as the entity, approved by a class action settlement administrator, making the settlement payment to the qualified taxpayer.
7. Finds and declares, for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, that the purpose of this bill's exclusion is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from devastating wildfires.
8. Requires the FTB to annually submit a written report to the Legislature no later than November 1, 2027, that includes the number of qualified taxpayers that excluded qualified amounts from gross income as a result of the exclusion allowed by this bill, and the aggregate amount of those settlement payments arising out of wildfires. The disclosure of this information is treated as an exception to the prohibition on divulging identifying taxpayer information.
9. Takes immediate effect as a tax levy.
10. Provides that this bill's provisions remain in effect only until December 1, 2029, and are repealed as of that date.

EXISTING FEDERAL LAW:

1. Provides that gross income includes all income from whatever source derived, unless specifically excluded.
2. Excludes from gross income amounts received as a qualified disaster relief payment, as defined, in presidentially declared disaster areas. (Internal Revenue Code (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.
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, 17139.2, 17139.3, 24309.1, 24309.3, 24309.6, and 24309.7.)

FISCAL EFFECT: The Senate Appropriations Committee, in its analysis of this bill, states:

The FTB notes that, to determine the magnitude of this bill's potential revenue loss, both the frequency of wildfires and the dollar amounts arising from settlement payouts must be known. Because it is difficult to predict the frequency and settlement amounts paid, FTB indicates that the revenue impact to the General Fund (GF) is unknown. However, using an average tax rate of 7 percent, FTB assumes that for every $100 million in qualified settlement income received, the estimated revenue loss would be approximately $7 million.

Committee staff notes that, given the potential ongoing liability to the GF, this bill qualifies for this Committee's Suspense File.

COMMENTS:

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

The Legislature has decided multiple times that wildfire settlements should not be taxed. In 2022, SB 1246 and AB 1249 were signed into law making settlements related to the Thomas Fire, the Woolsey Fire, the Butte Fire, the North Bay Fires, and the Camp Fire tax exempt. Similarly, SB 370 and SB 542 proposed to do the same for the Kincade Fire and the Zogg Fire and passed the Senate unanimously in 2023.

In 2020 the Bobcat Fire, which burned over 115,000 acres in and around my district, was determined to have been caused by a tree coming in contact with power lines. Unfortunately, any settlements my constituents receive related to this fire will not be tax free because the Bobcat Fire was not included in past legislative efforts.

All wildfire victims should be afforded the same tax relief as those affected by these previously mentioned fires. SB 1004 will ensure that all wildfire settlements are tax-free regardless of where you live.

1. The California Apartment Association, writing in support of this bill, states, in part:

Existing law does not specifically exclude from gross income amounts received from wildfire settlements. As we all know, wildfires are a perennial issue in California. This creates an unfortunate situation for property owners who have suffered from wildfires and receive an insurance settlement to help rebuild but then get taxed on those settlements. This creates a double disaster for these victims. Often the Legislature approves income tax exclusions for settlement payments for specific fires such as the Butte Fire and North Bay Fires. SB 1004 would eliminate the need for the Legislature to pass a wildfire specific exclusion each time there is a need and instead proactively provides the exclusion for all wildfires.

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 Cal Fire, 15 of the 20 most destructive wildfires in California's history have occurred in the last decade. Additionally, 9 of those 20 most destructive wildfires have been attributed to faulty power lines and electrical equipment.
   2. Treatment of settlement awards: Generally, federal and state law allows 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. However, amounts resulting from emotional distress 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 all amounts received in settlements resulting from a wildfire when calculating a taxpayer's gross income.
   3. Tax treatment of federal disaster areas: Federal and state law allows a deduction of losses sustained in federally declared disaster areas. If a wildfire has been declared a major disaster by the federal government, 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 also 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 a wildfire.
   4. 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 absent special legislation. To the extent any wildfire qualifying for this bill's exclusion is declared a federal disaster area, disaster relief payments to taxpayers impacted by that fire 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." In response, the Legislature has passed, and the Governor signed into law, additional gross income exclusions for the 2019 Kincade Fire, and the 2020 Zogg Fire.

Additionally, just last year, AB 294 (Petrie-Norris) was passed by this Committee. AB 294 would have authorized a general gross income exclusion for amounts of settlement payments resulting from any wildfire, similar to this bill. AB 294 was held on the Assembly Appropriations Committee's Suspense File. Given the Legislature's willingness to act on individual, discreet wildfires, the Governor's signing message indicating these measures be handled holistically through the budget, and the failure of a very similar proposal last year, this Committee may wish to consider whether this vehicle is the appropriate mechanism to provide tax relief to wildfire victims receiving settlement payments.

• 1. Out of conformity: Generally, California conforms, with certain modifications, to the IRC. 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 wildfires, thereby constituting a tax expenditure.
  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 contains an appropriate five-year sunset and complies with the requirements of R&TC Section 41.
  4. Related legislation:
     1. AB 1973 (Lackey) would exclude from gross income settlement amounts received by qualifying taxpayers related to the Bobcat Fire. AB 1973 is pending hearing by the Senate Appropriations Committee.
     2. AB 294 (Petrie-Norris) would have excluded from gross income settlement amounts received by qualifying taxpayers related to a wildfire in California for a period of five years. AB 294 was held on the Assembly Committee's Appropriations Suspense File.
     3. SB 131 (Committee on Budget and Fiscal Review), Chapter 55, Statutes of 2023, excluded from gross income, under the PIT Law and the CT Law, settlement amounts received by qualifying taxpayers related to the Kincade or Zogg Fires.
  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

California Apartment Association

California Forestry 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: June 24, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

SBPCA Bill Id:SB 1004

Author:(Wilk) – As Amended Ver:March 14, 2024

Majority vote. Fiscal committee.

SENATE VOTE: 37-0

SUBJECT: Income taxes: exclusions: wildfires

SUMMARY: Excludes from a "qualified taxpayer's" gross income, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, any "qualified amount," for a specified period. Specifically, this bill:

1. Excludes from gross income any "qualified amount" received by a "qualified taxpayer," for taxable years beginning on or after January 1, 2020, and before January 1, 2034.
2. Requires, upon request, a "settlement entity" to provide documentation of the settlement payments in the form and manner requested by the Franchise Tax Board (FTB) to the FTB, or to the "qualified taxpayer" who may then provide the documentation to the FTB.
3. Defines a "qualified amount" as any amount received in settlement by a "qualified taxpayer" to replace property damaged or destroyed by a wildfire if the property damaged or destroyed is located in an area of California damaged by the wildfire.
4. Defines a "qualified taxpayer" as any taxpayer that:
   1. Owns real property located in an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire; or,
   2. Has a place of business within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
5. Provides, under the PIT Law, that a "qualified taxpayer" additionally includes any taxpayer who resides within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
6. Defines a "settlement entity" as the entity, approved by a class action settlement administrator, making the settlement payment to the qualified taxpayer.
7. Finds and declares, for the purposes of complying with Revenue and Taxation Code (R&TC) Section 41, that the purpose of this bill's exclusion is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from devastating wildfires.
8. Requires the FTB to annually submit a written report to the Legislature no later than November 1, 2027, that includes the number of qualified taxpayers that excluded qualified amounts from gross income as a result of the exclusion allowed by this bill, and the aggregate amount of those settlement payments arising out of wildfires. The disclosure of this information is treated as an exception to the prohibition on divulging identifying taxpayer information.
9. Takes immediate effect as an urgency measure.
10. Provides that this bill's provisions remain in effect only until December 1, 2024, and are repealed as of that date.

EXISTING FEDERAL LAW:

1. Provides that gross income includes all income from whatever source derived, unless specifically excluded.
2. Excludes from gross income amounts received as a qualified disaster relief payment, as defined, in presidentially declared disaster areas. (Internal Revenue Code (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.
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, 17139.2, 17139.3, 24309.1, 24309.3, 24309.6, and 24309.7.)

FISCAL EFFECT: The Senate Appropriations Committee, in its analysis of this bill, states:

The FTB notes that, to determine the magnitude of this bill's potential revenue loss, both the frequency of wildfires and the dollar amounts arising from settlement payouts must be known. Because it is difficult to predict the frequency and settlement amounts paid, FTB indicates that the revenue impact to the General Fund (GF) is unknown. However, using an average tax rate of 7 percent, FTB assumes that for every $100 million in qualified settlement income received, the estimated revenue loss would be approximately $7 million.

Committee staff notes that, given the potential ongoing liability to the GF, this bill qualifies for this Committee's Suspense File.

COMMENTS:

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

The Legislature has decided multiple times that wildfire settlements should not be taxed. In 2022, SB 1246 and AB 1249 were signed into law making settlements related to the Thomas Fire, the Woolsey Fire, the Butte Fire, the North Bay Fires, and the Camp Fire tax exempt. Similarly, SB 370 and SB 542 proposed to do the same for the Kincade Fire and the Zogg Fire and passed the Senate unanimously in 2023.

In 2020 the Bobcat Fire, which burned over 115,000 acres in and around my district, was determined to have been caused by a tree coming in contact with power lines. Unfortunately, any settlements my constituents receive related to this fire will not be tax free because the Bobcat Fire was not included in past legislative efforts.

All wildfire victims should be afforded the same tax relief as those affected by these previously mentioned fires. SB 1004 will ensure that all wildfire settlements are tax-free regardless of where you live.

1. The California Apartment Association, writing in support of this bill, states, in part:

Existing law does not specifically exclude from gross income amounts received from wildfire settlements. As we all know, wildfires are a perennial issue in California. This creates an unfortunate situation for property owners who have suffered from wildfires and receive an insurance settlement to help rebuild but then get taxed on those settlements. This creates a double disaster for these victims. Often the Legislature approves income tax exclusions for settlement payments for specific fires such as the Butte Fire and North Bay Fires. SB 1004 would eliminate the need for the Legislature to pass a wildfire specific exclusion each time there is a need and instead proactively provides the exclusion for all wildfires.

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 Cal Fire, 15 of the 20 most destructive wildfires in California's history have occurred in the last decade. Additionally, 9 of those 20 most destructive wildfires have been attributed to faulty power lines and electrical equipment.
   2. Treatment of settlement awards: Generally, federal and state law allows 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. However, amounts resulting from emotional distress 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 all amounts received in settlements resulting from a wildfire when calculating a taxpayer's gross income.
   3. Tax treatment of federal disaster areas: Federal and state law allows a deduction of losses sustained in federally declared disaster areas. Both the Woolsey and Thomas fires were declared major disasters by the federal government, and unreimbursed losses sustained in those areas as a result of those fires 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 also 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 a wildfire.
   4. 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 absent special legislation. To the extent any wildfire qualifying for this bill's exclusion is declared a federal disaster area, disaster relief payments to taxpayers impacted by that fire 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." In response, the Legislature has passed, and the Governor signed into law, additional gross income exclusions for the 2019 Kincade Fire, and the 2020 Zogg Fire.

Additionally, just last year, AB 294 (Petrie-Norris) was passed by this Committee. AB 294 would have authorized a general gross income exclusion for amounts of settlement payments resulting from a Governor-declared disaster. AB 294 differs from this bill in that AB 294 provided the exclusion for a period of five years, prospectively; whereas this bill provides a 14-year exclusion, retroactive to taxable years beginning on or after January 1, 2020.

Finally, the author notes that the 2020 Bobcat Fire has not received the same treatment as other wildfires. This Committee, however, passed AB 1973 (Lackey) earlier this year, and AB 1973 would provide an exclusion for the 2020 Bobcat Fire. Given the Legislature's willingness to act on individual, discreet wildfires, the Governor's signing message indicating these measures be handled holistically through the budget and the failure of a very similar, but narrower, proposal last year, this Committee may wish to consider whether this vehicle is the appropriate mechanism to provide tax relief to wildfire victims receiving settlement payments.

• 1. This bill: As currently drafted, this bill provides a retroactive gross income exclusion for certain settlement payments resulting from Governor-declared disasters for a period of 14 years in violation of this Committee's rules. Moreover, in December 2023, the Los Angeles County Office of County Counsel released a statement confirming that the County had agreed to settle a lawsuit filed against Southern California Edison for $80 million in connection with the Bobcat Fire, and any related settlement payments would not be disbursed until the 2024 taxable year at the earliest. Given that the author's impetus for this bill's retroactive exclusion is ostensibly to provide relief to Bobcat Fire victims, the author and Committee may wish to consider making this general exclusion prospective and apply an appropriate five-year sunset.
  2. Out of conformity: Generally, California conforms, with certain modifications, to the IRC. 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.
  3. 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 wildfires, thereby constituting a tax expenditure.
  4. 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 does not contain an appropriate five-year sunset, but does comply with the requirements of R&TC Section 41.
  5. Related legislation:
     1. AB 1973 (Lackey) would exclude from gross income settlement amounts received by qualifying taxpayers related to the Bobcat Fire. AB 1973 is pending hearing by the Senate Committee on Revenue and Taxation.
     2. AB 294 (Petrie-Norris) would have excluded from gross income settlement amounts received by qualifying taxpayers related to a wildfire in California for a period of five years. AB 294 was held on the Assembly Committee's Appropriations Suspense File.
  6. Prior legislation:
     1. SB 131 (Committee on Budget and Fiscal Review), Chapter 55, Statutes of 2023, excluded from gross income, under the PIT Law and the CT Law, settlement amounts received by qualifying taxpayers related to the Kincade or Zogg Fires.
     2. 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.
     3. 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.
     4. 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

California Apartment Association

California Forestry 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. ↑

 THIRD READING  

Bill No: SB 1004

Author: Wilk (R)

Amended: 3/14/24

Vote: 21

SENATE REVENUE AND TAXATION COMMITTEE: 7-0, 3/13/24

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

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/16/24

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

SUBJECT: Income taxes: exclusions: wildfires

SOURCE: Author

DIGEST:

This bill excludes amounts received in settlement by a taxpayer to replace property damaged or destroyed by wildfire.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions.
2. Includes, in 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 of 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 wildfire settlement payments not specifically identified in statute.

This bill:

1. Excludes from gross income under the Personal Income and Corporation Taxes any amount received in settlement by a qualified taxpayer to replace property damaged or destroyed by a wildfire.
2. Applies beginning in the 2020 taxable year and ends after the 2033 taxable year.
3. Requires the settlement entity or the qualified taxpayer to provide to the Franchise Tax Board (FTB), upon request, any documentation of the settlement payments in the form and manner requested by FTB.
4. Defines a “qualified taxpayer” as a taxpayer who owns real property located in, resides within, or has a place of business within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
5. Defines a “qualified amount” as any amount received in settlement by a qualified taxpayer to replace property damaged or destroyed by wildfire if the property damaged or destroyed is located in an area of California damaged by the wildfire.
6. Makes legislative findings and declarations supporting its purposes, including those to comply with Section 41 of the Revenue and Taxation Code, and that its provisions do not constitute a gift of public funds.

Background

California Fires. Over the last decade, California has experienced increased, intense, and record-breaking wildfires throughout the state. These fires have resulted in 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 the 20 most destructive fires in California history. According to Cal Fire, in 2022 alone there were over 7,490 incidents and over 362,000 million acres of scorched land. In 2021, wildfire destroyed 2.5 million acres. Public utilities have entered into settlements for many wildfire incidents where they were involved, where settlement entities such as the Fire Victim Trust make payments to those affected by the incident.

Standardization. Between 1991 and 2009, the Legislature responded to natural disasters by enacting specific bills for each disaster that typically contained three parts:

• First, allowing taxpayers to claim excess disaster losses, where taxpayers can immediately file amended returns claiming losses attributable to the disaster, often generating a refund of previous taxes paid,
• Second, directing the assessor not to revoke a taxpayer’s homeowners’ exemption because their residence was temporarily damaged, destroyed, was being reconstructed by the owner, or was temporarily uninhabited as a result of restricted access, as a result of the disaster.
• Third, backfilling property tax revenue losses for local agencies resulting from the disaster.

Over time, the Legislature enacted general statutes to apply the first two parts whenever the Governor declared a disaster. SB 1494 (Committee on Revenue and Taxation, Chapter 654, Statutes of 2010) precluded assessors from revoking homeowners’ exemptions for disaster-affected property upon a declaration of a state of emergency from the Governor. SB 35 (Wolk, Chapter 230, Statutes of 2015) allowed for disaster loss treatment for any loss sustained from a disaster in any city, county, or city and county in California that the Governor has proclaimed to be in a state of emergency through the 2023 taxable year; last year, the Legislature extended general disaster loss treatment another five years (SB 264, Niello, Chapter 285, Statutes of 2023). SB 1004 continues the trend of the Legislature enacting general tax relief in the event of a future wildfire, in this case for qualified taxpayers who receive settlement payments from those entities involved in the natural disaster.

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

According to the Senate Appropriations Committee:

FTB estimates that for every $100 million in qualified settlement income received, the General Fund revenue loss would be approximately $7 million. FTB’s costs to implement the bill have yet to be identified.

SUPPORT: (Verified 5/07/24)

California Apartment Association
California Forestry Association

OPPOSITION: (Verified 5/07/24)

None received

ARGUMENTS IN SUPPORT: According to the author:

“The Legislature, and specifically the Senate, has decided multiple times that settlements related to wildfires should not be taxed. In 2022, SB 1246 and AB 1249 were signed into law making settlements related to the Thomas Fire, the Woolsey Fire, the Butte Fire, the North Bay Fires, and the Camp Fire tax exempt. Similarly, SB 370 and SB 542 proposed to do the same for the Kincade Fire and the Zogg Fire and passed the Senate unanimously in 2023. All wildfire victims should be afforded the same tax relief as those affected by these previously mentioned fires. SB 1004 will ensure that all wildfire settlements are tax-free regardless of where you live.”

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

5/17/24 11:56:23

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anna Caballero, Chair

2023 - 2024 Regular Session

SB 1004 (Wilk) - Income taxes: exclusions: wildfires

Bill Summary:

SB 1004 would enact personal income and corporation tax exclusions for amounts received in settlement by a taxpayer to replace property damaged or destroyed by wildfire.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that for every $100 million in qualified settlement income received, the General Fund revenue loss would be approximately $7 million. FTB’s costs to implement the bill have yet to be identified.

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 California Department of Forestry and Fire Protection indicates that in 2022, there were over 7,490 incidents and over 362,000 acres of scorched land. The previous year, wildfires destroyed 2.5 million acres statewide. Public utilities have subsequently entered into monetary settlements for many wildfire incidents where they were involved.

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 Southern California Edison 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, among other things, do the following in taxable years 2020 through 2033:

• Enact personal income and corporation tax exclusions when a qualified taxpayer receives a qualified amount, using similar definitions from previously enacted measures.
• Define “qualified amount” as any amount received in settlement by a qualified taxpayer to replace property damaged or destroyed by wildfire if the property damaged or destroyed is located in an area of California damaged by the wildfire.
• Define “qualified taxpayer” to mean:
  • Any taxpayer that owns real property located in an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
  • Any taxpayer that resides within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
  • Any taxpayer that has a place of business within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.

Related Legislation:

• SB 1004 is very similar to AB 294 (Petrie-Norris, 2023), which was held under submission on the Suspense File of the Assembly Appropriations Committee.
• SB 927 (Dahle) would enact similar exclusions when taxpayers receive settlement payments due to any natural disaster, not just a wildfire, when both the Governor and the President of the United States declare a state of emergency. Note that this bill’s exclusion would not require an emergency declaration, and would apply solely to wildfires. SB 927 is currently pending in this Committee.
• SB 1102 (Nguyen) would enact 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. The bill is currently pending in the Senate Committee on Revenue and Taxation.
• SB 542 (Dahle) would enact similar exclusions for qualified taxpayers receiving settlement payments from the 2021 Dixie Fire or the 2022 Mill Fire. The bill is currently pending in the Assembly Appropriations Committee.

Staff Comments:

FTB notes that, to determine the magnitude of this bill’s potential revenue loss, both the frequency of wildfires and the dollar amounts arising from settlement payouts must be known. Because it is difficult to predict the frequency and settlement amounts paid, FTB indicates that the revenue impact to the General Fund is unknown. However, using an average tax rate of 7 percent, FTB assumes that for every $100 million in qualified settlement income received, the estimated revenue loss would be approximately $7 million.

-- END --

SENATE COMMITTEE ON REVENUE AND TAXATION

Senator Steven Glazer, Chair

2023 - 2024 Regular

Income taxes: exclusions: wildfires

Enacts Personal Income and Corporation Tax exclusions for amounts received in settlement by a taxpayer to replace property damaged or destroyed by wildfire.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives either to compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that 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 its 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 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.

California Fires. Over the last decade, California has experienced increased, intense, and record-breaking wildfires throughout the state. These fires have resulted in 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 the 20 most destructive fires in California history. According to Cal Fire, in 2022 alone there were over 7,490 incidents and over 362,000 million acres of scorched land. In 2021, wildfire destroyed 2.5 million acres. Public utilities have entered into settlements for many wildfire incidents where they were involved, where settlement entities such as the Fire Victim Trust make payments to those affected by the incident.

Disaster tax relief. In recent years, the Legislature has 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 applied to amounts received by a qualified taxpayer in settlement from the PG&E trust related to the 2015 Butte, 2017 North Bay, and 2018 Camp Fires.
• SB 1246 (Stern, 2022), which applied to amounts received by a qualified taxpayer in settlement from Southern California Edison related to the 2017 Thomas Fire and the 2018 Woolsey Fire.
• SB 131 (Committee on Budget & Fiscal Review, 2023) which applied to amounts received in settlements by a qualified taxpayer associated with either the 2019 Kincade Fire in the County of Sonoma, or the 2020 Zogg Fire in the Counties of Tehama and Shasta.

However, some victims of 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 unless and until the Legislature enacts a bill. The author wants to enact income exclusions that apply whenever a wildfire gives rise to settlement payments to affected individuals and businesses.

Proposed Law

Senate Bill 1004 enacts Personal Income and Corporation Tax exclusions when a qualified taxpayer receives a qualified amount, using similar definitions from previously enacted measures. The measure applies retroactively, commencing in the 2020 taxable year.

The measure defines “qualified amount” as any amount received in settlement by a qualified taxpayer to replace property damaged or destroyed by wildfire if the property damaged or destroyed is located in an area of California damaged by the wildfire.

The bill then defines “Qualified taxpayer” to mean:

• Any taxpayer that owns real property located in an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
• Any taxpayer that resides within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.
• Any taxpayer that has a place of business within an area damaged by a wildfire who paid or incurred expenses, and received amounts from a settlement, arising out of or pursuant to the wildfire.

The measure requires any settlement entity to provide the Franchise Tax Board (FTB) or the qualified taxpayer with documentation of the settlement payments. The measure also contains legislative findings and declarations to comply with Section 41 of the Revenue and Taxation Code.

State Revenue Impact

According to FTB, “to determine the magnitude of the potential impact to the General Fund, both, the frequency of wildfires and the dollar amounts arising from settlement payouts must be known. Because it is difficult to predict the frequency of wildfires as well as the amount and timing of settlement payouts, the revenue impact to the General Fund is unknown. However, it is assumed that for every $100 million in qualified settlement amounts received, and applying an average tax rate of 7 percent, the estimated revenue loss would be approximately $7 million.”

Comments

1. Purpose of the bill. According to the author, “the Legislature, and specifically the Senate, has decided multiple times that settlements related to wildfires should not be taxed. In 2022, SB 1246 and AB 1249 were signed into law making settlements related to the Thomas Fire, the Woolsey Fire, the Butte Fire, the North Bay Fires, and the Camp Fire tax exempt. Similarly, SB 370 and SB 542 proposed to do the same for the Kincade Fire and the Zogg Fire and passed the Senate unanimously in 2023. All wildfire victims should be afforded the same tax relief as those affected by these previously mentioned fires. SB 1004 will ensure that all wildfire settlements are tax-free regardless of where you live.”

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 match the foregone revenue.

3. Standardization. Between 1991 and 2009, the Legislature responded to natural disasters by enacting specific bills for each disaster that typically contained three parts:

• First, allowing taxpayers to claim excess disaster losses, where taxpayers can immediately file amended returns claiming losses attributable to the disaster, often generating a refund of previous taxes paid,
• Second, directing the assessor not to revoke a taxpayer’s homeowners’ exemption because their residence was temporarily damaged, destroyed, was being reconstructed by the owner, or was temporarily uninhabited as a result of restricted access, as a result of the disaster.
• Third, backfilling property tax revenue losses for local agencies resulting from the disaster.

Over time, the Legislature enacted general statutes to apply the first two parts whenever the Governor declared a disaster. SB 1494 (Committee on Revenue and Taxation, 2010) precluded assessors from revoking homeowners’ exemptions for disaster-affected property upon a declaration of a state of emergency from the Governor. SB 35 (Wolk, 2015) allowed for disaster loss treatment for any loss sustained from a disaster in any city, county, or city and county in California that the Governor has proclaimed to be in a state of emergency through the 2023 taxable year; last year, the Legislature extended general disaster loss treatment another five years (SB 264, Niello). SB 1004 continues the trend of the Legislature enacting general tax relief in the event of a future wildfire, in this case for qualified taxpayers who receive settlement payments from those entities involved in the wildfire.

4. No conformity. While following several precedents in state law, this bill creates an income exclusion 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. Currently pending in the United States Senate, HR 7024 would provide similar treatment for federal taxes as SB 1004 would for state purposes.

5. Related legislation. SB 1004 is very similar to AB 294 (Petrie-Norris, 2023), which the Assembly Revenue and Taxation Committee approved unanimously, but was subsequently held on the Assembly Appropriations Committee Suspense File. Additionally, two other measures have been referred to the Revenue and Taxation Committee:

• 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; SB 1004’s exclusion does not require an emergency declaration, and applies solely to wildfires.
• 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.

Additionally, SB 542 (Dahle) is currently pending in the Assembly Appropriations Committee, which would enact similar exclusions for qualified taxpayers receiving settlement payments from the 2021 Dixie Fire or the 2022 Mill Fire.

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 a detailed performance indicators, along with data collection and reporting requirements (SB 1335, Leno, 2014). To satisfy these requirements, SB 1004 states that its goal, purpose, and objective is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from devastating wildfires. The bill then directs FTB to provide information to the Legislature by November 1, 2027 that includes the number of qualified taxpayers who excluded income as a result of the bill, and the aggregate amount of settlement payments arising out of wildfires.

7. Gift of Public Funds. Section Six of Article XVI of the California Constitution prohibits the Legislature from making a gift of public funds. By applying its provisions retroactively to the 2020 taxable year, SB 1004 could be construed to constitute a gift of public funds; however, the bill includes provisions stating legislative intent that the bill does not because it is necessary to prevent undue hardship to taxpayers who reside, or used to reside, in a part of California devastated by wildfires.

8. Sunset? SB 1004 both excludes from taxable income amounts paid to those affected by previous wildfires where the Legislature has not enacted a bill, and provides that similar payments resulting from future wildfires isn’t taxable either. However, a future Legislature may want to evaluate the bill’s impacts. The Committee may wish to consider amending SB 1004 to sunset its provisions after ten years.

Support and Opposition

(3/8/24)

Support: None received.

Opposition: None received.

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