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, 2025, and before January 1, 2030, would provide an exclusion from gross income for amounts received from a settlement entity, as defined, by a qualified taxpayer, as defined, to replace property that is located in a city or county in this state and that was damaged or destroyed by a disaster or accidental or human-caused event for which a state of emergency or local emergency, as defined, was proclaimed.

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 take effect immediately as a tax levy.

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, 2025, and before January 1, 2030, would provide an exclusion from gross income for amounts received from a settlement entity, as defined, by a qualified taxpayer, as defined, to replace property that is located in a city or county in this state and that was damaged or destroyed by a natural disaster that was declared a state of emergency by the Governor. or accidental or human-caused event for which a state of emergency or local emergency, as defined, was proclaimed.

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 take effect immediately as a tax levy.

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, 2025, would provide an exclusion from gross income for amounts received from a settlement entity, as defined, by a qualified taxpayer, as defined, to replace property damaged or destroyed by a natural disaster that was declared a state of emergency by the Governor.

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 take effect immediately as a tax levy.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anna Caballero, Chair

2025 - 2026 Regular Session

SB 268 (Choi) - Income taxes: gross income exclusions: state of emergency: natural disaster settlements

Bill Summary:

SB 268 would enact a personal income and corporation tax exclusion for settlement payments received by a taxpayer to replace property damaged or destroyed by a disaster, or accidental or human caused event, for which a state of emergency or local emergency was proclaimed by the Governor.

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 $6.2 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 $91 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 2024, there were 605,868 emergency responses, 8,024 wildfires, 1,050,012 acres burned, and 2,148 structures damaged or destroyed. In 2023, there were 595,075 emergency responses, 7,386 wildfires, 332,822 acres burned, and 179 structures damaged or destroyed. Through May 6, 2025, the current calendar year has seen 208,397 emergency responses, 1,083 wildfires, 61,205 acres burned, and 16,251 structures damaged or destroyed. Fires attributed to power lines and electrical equipment comprise nine of California’s 20 most destructive fires. 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.

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, victims of future natural disasters who receive settlement payments may not be able to exclude them from taxable income for state purposes absent legislation. Additionally, some taxpayers may have received settle payments in connection with other natural disasters in the past where the Legislature has not enacted an exclusion specific to that disaster.

Proposed Law:

This bill, for taxable years 2025 through 2030, would among other things, (1) enact personal income and corporation tax exclusions for any amount received in a class action settlement by a taxpayer to replace property damaged or destroyed by a disaster, or accidental or human-caused event, for which a state of emergency or local emergency was proclaimed by the Governor, and (2) require the settlement entity to provide documentation to FTB or to a qualified taxpayer upon request.

Related Legislation:

• SB 927 (Dahle, 2024) is substantively similar to this bill and was held under submission on the Suspense File of this Committee.
• SB 1004 (Wilk, 2024) also prosed a similar exclusion to this bill, but only applied to wildfire settlement payments. The bill was held under submission on the Suspense File of the Assembly Appropriations Committee.
• SB 542 (Dahle, 2024), which applied to amounts received in settlements associated with either the 2021 Dixie Fire or the 2022 Mill Fire, and AB 1973, which applied to settlements associated with either the 2020 Bobcat Fire, were both vetoed by Governor Newsom.
• The Governor’s Budget for 2025-26 proposes to exempt all wildfire settlements from state taxation for settlements paid in tax years 2025 through 2029, regardless of when the fire occurred.

Staff Comments: FTB indicates that this bill’s revenue impact on the General Fund is unknown, because it is difficult to predict (1) the frequency of disasters, and (2) the amount and timing of settlement payouts. However, for every $100 million in qualified amounts received, and applying an average tax rate of 6.2 percent, FTB assumes the revenue loss would be approximately $6.2 million.

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SENATE COMMITTEE ON REVENUE AND TAXATION

Senator Jerry McNerney, Chair

2025 - 2026 Regular

Income taxes: gross income exclusions: state of emergency: natural disaster settlements

Enacts a Personal Income and Corporation Tax exclusion for settlement payments received by a taxpayer to replace property damaged or destroyed by a disaster, or accidental or human-caused event, for which a state of emergency or local emergency was proclaimed by the Governor.

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 charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something they would otherwise not do, but for the tax credit. The Department of Finance is required annually to publish a list of tax expenditures, which currently total around $91.5 billion.

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 exclude certain types of income from gross income, such as specified 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, among other things.

Treatment of settlement awards. Generally, federal and state law allow 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 require the 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. These fires have resulted in a devastating loss of life and billions of dollars in damage to property and infrastructure. According to the California Department of Forestry and Fire Protection (CAL FIRE), in 2024 alone, there were 605,868 emergency responses; 8,024 wildfires; 1,050,012 acres burned; 2,148 structures damaged or destroyed; and one fatality. In 2023, there were 595,075 emergency responses; 7,386 wildfires; 332,822 acres burned; 179 structures damaged or destroyed; and four fatalities. As of May 6, 2025, for the year 2025, there have already been 208,397 emergency responses; 1,083 wildfires; 61,205 acres burned; 16,251 structures damaged or destroyed; and 30 fatalities.

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 California’s 20 most destructive fires. 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 in settlement from the PG&E trust to fire victims of the 2015 Butte, 2017 North Bay, and 2018 Camp Fires.
• SB 1246 (Stern, 2022), which applied to amounts received 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 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, victims of future disasters who receive settlement payments may be unable to exclude them from taxable income for state purposes unless and until the Legislature enacts a bill. Additionally, some taxpayers may have received settlement payments in connection with other disasters in the past, where the Legislature has not enacted an exclusion specific to that disaster.

The author wants to enact income exclusions that apply whenever a disaster is proclaimed a state of emergency or local emergency by the Governor and results in settlement payments to affected individuals and businesses.

Proposed Law

Senate Bill 268 enacts Personal Income and Corporation Tax exclusions for any amount received in a class action settlement by a taxpayer to replace property damaged or destroyed by a disaster, or accidental or human-caused event, for which a state of emergency or local emergency was proclaimed by the Governor. The exclusion applies starting in the 2025 taxable year through the 2030 taxable year. The bill requires the settlement entity to provide documentation to the Franchise Tax Board (FTB) or to a qualified taxpayer upon request. The bill also makes legislative findings and declarations supporting its purposes and complies with Section 41 of the Revenue and Taxation Code.

State Revenue Impact

According to the FTB, the revenue impact on the General Fund from SB 268 is unknown. This is because it is difficult to predict the frequency of disasters and the amount and timing of settlement payouts. However, it is assumed that for every $100 million in qualified amounts received, and applying an average tax rate of 6.2 percent, the estimated revenue loss would be approximately $6.2 million.

Comments

1. Purpose of the bill. According to the author, “Existing federal and state laws do not specifically exclude any received settlement payment amounts resulting from a proclaimed state of emergency from gross income. This means that victims of natural disasters who receive settlement payments pay personal income taxes on settlement payments, unless a bill is introduced in the state legislature to specifically exclude them. SB 268 bill will specifically exclude the settlement payments received by victims of any proclaimed state of emergency from their gross income, meaning those payments will be tax free. Many victims who desperately need the settlement money to rebuild their homes will no longer face income tax liability when they receive their settlement payment.”
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. Disaster, or accidental or human-caused event. In addition to the wildfires that the governor has proclaimed states of emergency for, other state and local emergencies have resulted in property damage and class action settlements in the past, including:

• Aliso Canyon Gas-Storage Leak (Los Angeles County, Oct. 2015 – Feb. 2016), where SoCal Gas and parent Sempra agreed in September 2021 to pay up to $1.8 billion to resolve roughly 35,000 lawsuits consolidated in Los Angeles Superior Court for plaintiff damages related to health and property value loss.
• Refugio State Beach Oil Spill (Santa Barbara County, May 19, 2015), where Plains All American pipeline agreed to a $230 million settlement covering two class action groups: commercial fishers/processors and shoreline property owners.
• Huntington Beach / Orange County Offshore Oil-Pipeline Leak (Oct. 1, 2021), where the Amplify Energy pipeline paid a $50 million settlement for damages incurred by coastal property owners. Shipping companies later paid an additionally $45 million to victims.

1. 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 destroyed or temporarily damaged, 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 by 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; in 2023, the Legislature extended general disaster loss treatment another five years (SB 264, Niello). SB 268 continues the trend of the Legislature enacting general tax relief in the event of a future disaster proclaimed a state of emergency by the Governor, in this case for qualified taxpayers who receive settlement payments from those entities involved related to the disaster.

1. Precedent. Income is generally taxable, regardless of the source from which it is derived. If the Legislature allows an exclusion for disaster settlements, why should it not extend the same treatment to all settlements involving destruction or damage to property? This may lead to a slippery slope where settlement payments for damage to property are excluded from gross income, thereby eroding the income tax base.
   
2. Equity. SB 268 advances social equity by ensuring that disaster relief settlements are not taxed as income, which disproportionately benefits low- and middle-income households that lack financial reserves to recover from disasters and unexpected tax liability from settlement payments. These families are more likely to experience severe hardship due to property loss, especially in rural, immigrant, and historically underserved communities.
   
3. Who benefits? California’s progressive income tax system applies higher marginal rates as annual taxable income grows above certain thresholds. As a result, enacting a gross income exclusion benefits higher income earners more than others; a taxpayer whose income from other sources puts them in the 12.3% bracket has a higher dollar benefit from SB 268’s exclusion than a taxpayer in the 4% bracket. Additionally, corporations are likely to have greater property damages and losses than individuals. As a result, this exclusion benefits corporations more than it does individuals.
4. Conformity. On December 12, 2024, President Biden signed the Federal Disaster Tax Relief Act of 2023 (FDTRA; H.R. 5863 (P.L. 118-148)). The FDTRA provides tax relief by providing an income exclusion for qualified wildfire relief payments for qualified wildfire relief payments received by an individual during the 2020 through 2025 taxable years related to a federally declared disaster. 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.
5. Related legislation. SB 268 is substantively similar to SB 927 (Dahle, 2024), which died in the Senate Appropriations Committee. SB 1004 (Wilk, 2024) also prosed a similar exclusion to SB 268, but was more narrow as it only applying to wildfire settlement payments, and died in the Assembly Appropriations Committee.

Additionally, SB 542 (Dahle, 2024), which applied to amounts received in settlements associated with either the 2021 Dixie Fire or the 2022 Mill Fire, and AB 1973, which applied to settlements associated with either the 2020 Bobcat Fire, were vetoed; the governor’s veto message read in relevant part:

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.

Finally, the Governor’s Budget for 2025-26 proposes to exempt all wildfire settlements from state taxation for settlements paid in tax years 2025 through 2029, regardless of when the fire occurred.

1. Section 41. Section 41 of the Revenue and Taxation Code requires any bill enacting a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve and detailed performance indicators, along with data collection and reporting requirements (SB 1335, Leno, 2014). A bill that would authorize a new gross income exclusion is exempt from the requirement that the bill contain detailed performance indicators and data collection reporting if the Legislature determines there is no available data to collect and report (AB 3289, Committee on Revenue and Taxation, 2024). To satisfy these requirements, SB 268 finds and declares that the specific goal, purpose, and objective of the exclusion is to provide essential relief to individuals who have suffered injury, loss, inconvenience, and expenses resulting from disasters or accidental or human-caused events. The measure also declares that there is no available data to collect or report with respect to the exclusions.

Support and Opposition

(5/9/25)

Support: California Apartment Association

Independent Insurance Agents & Brokers of California, Inc.

Opposition: None received.

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