BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 50| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 50 Author: Hill (D) Amended: 3/17/11 in Senate Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 7-0, 3/16/11 AYES: Wolk, DeSaulnier, Fuller, Hancock, Hernandez, La Malfa, Liu NO VOTE RECORDED: Huff, Kehoe SENATE APPROPRIATIONS COMMITTEE : 9-0, 3/17/11 AYES: Kehoe, Walters, Alquist, Emmerson, Lieu, Pavley, Price, Runner, Steinberg ASSEMBLY FLOOR : 75-0, 3/3/11 - See last page for vote SUBJECT : San Bruno Gas Explosion Tax Exclusion SOURCE : Author DIGEST : This bill deems that the San Bruno explosion to be a qualified disaster for purposes of disaster payments, thereby allowing taxpayers to exclude disaster relief payments from state income. This bill also provides similar treatment for involuntary conversions resulting from a disaster. ANALYSIS : Existing federal and state law provides that income for purposes of taxation includes all income derived from any source, such as wages, dividends, interest, CONTINUED AB 50 Page 2 capital gains, rents, and royalties, unless specifically excluded, such as insurance payments. Federal tax law (Section 139 of the Internal Revenue Code ÝIRC]), to which state law conforms, provides for an exclusion from income for disaster relief compensation made in connection with a federally-declared disaster. This exclusion applies to payments for personal, family, living, or funeral expenses, as well as payments for expenses related to rebuilding or rehabilitating a personal residence and its contents, that are not compensated by insurance. Federal law also provides favorable tax for capital gains associated with the involuntary conversion of a principle residence property that was destroyed through no fault of the owner. In a federally-declared disaster, federal and state law excludes the first $250,000 (single) or $500,000 (joint) in capital gains related to involuntary conversions from income. The taxpayer may also defer the tax on the capital gain above those thresholds by purchasing a replacement property within specified time periods (generally two years after the year in which the gain is realized.) This bill provides favorable tax treatment for certain payments made to persons affected by the San Bruno natural gas transmission line explosion and subsequent fires on September 9, 2010. Specifically, this bill provides the following state tax benefits, as if the federal government had declared the San Bruno incident as a disaster: 1. Excludes qualified payments provided to individuals affected by the explosion from income for state income tax purposes. Only those payments for qualified expenses that are not covered by insurance compensation would be excluded from income. 2. Allows for deferral of capital gains related to the "involuntary conversion" of a principal residence that was partially or totally destroyed by the explosion and fire. Comments On September 9, 2010, a natural gas transmission line owned and operated by Pacific Gas & Electric Company (PG&E) exploded in San Bruno. According to National AB 50 Page 3 Transportation Safety Board investigative reports, the explosion and resulting fires killed eight people and destroyed 37 homes. Acting Governor Abel Maldonado proclaimed a state of emergency for the explosion site as a state disaster, but the federal government did not declare the explosion and fire to be a federal disaster, which would have automatically triggered the exclusion of qualified disaster relief payments under both state and federal law. In response, the Legislature approved the traditional three changes to tax law when disaster strikes: a state backfill for local property tax revenue losses attributable to downward reassessment of disaster-affected property, a prohibition on the assessor revoking the homeowners' exemption for disaster-affected property, and enhanced disaster losses for affected taxpayers (AB 11 X6 (Hall), Chapter 2, Statutes of 2010). Absent the federal declaration, these payments are taxable under both state and federal law. This bill treats specified disaster relief payments as a result of the San Bruno explosion and fire as if they were "qualified disaster relief payments" under a federal disaster declaration. As such, this bill allows taxpayers to exclude qualified payments from income for state income tax purposes. This bill also provides similar treatment for involuntary conversions resulting from the disaster. Following the San Bruno explosion and fire, PG&E set up a $100 million "Rebuild San Bruno Fund" to compensate affected individuals with payments for costs and losses not reimbursed by insurance, provide cash payments for immediate financial assistance, and reimbursements to San Bruno for disaster response and infrastructure costs. In addition, individual and corporate donors sent nearly $395,000 to the City of San Bruno to assist victims with recovery and rebuilding efforts, and the American Red Cross distributed $440,507 to meet personal living expenses, housing needs, furnishings, health needs, lost wage replacement, and mental health support. Only those payments that meet the criteria as "qualified disaster payments" under IRC Section 139 would be excluded from income for purposes of this bill. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes AB 50 Page 4 Local: No According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Tax revenue decrease $300 $6 General SUPPORT : (Verified 3/18/11) American Federation of State, County and Municipal Employees, AFL-CIO Pacific Gas & Electric Company ASSEMBLY FLOOR : AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, Donnelly, Eng, Feuer, Fong, Fuentes, Furutani, Galgiani, Garrick, Gatto, Gordon, Gorell, Grove, Hagman, Halderman, Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Fletcher, Hall, Mitchell, Smyth, Vacancy AGB:mw 3/18/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** AB 50 Page 5