BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Jenny Oropeza, Chair
SB 114 - Florez
Amended: February 20, 2007
Hearing: February 28, 2007 Urgency Fiscal: YES
SUBJECT: Income and Corporation Taxes : Deduction of
disaster losses
Property Tax : State reimbursement of local property tax
losses as a result of the 2007 severe freezing
conditions.
Homeowners' Exemption: Homes damaged or destroyed by
disaster
INCOME AND CORPORATION TAXES :
EXISTING STATE AND FEDERAL LAW allows taxpayers to
deduct disaster losses in the year the loss occurs or in
the preceding year by filing an amended return. Disaster
losses result from fires, storms, floods or other natural
events proclaimed a disaster by the President or the
Governor. Disaster losses are the amounts not compensated
for by insurance or other means.
EXISTING FEDERAL LAW, which California conforms to,
only allows loss deductions for personal income taxes that
exceed $100 per taxpayer and 10% of their adjusted gross
income for the year.
EXISTING STATE LAW limits disaster losses for
corporate taxpayers to the amounts set by state law for net
operating losses - 55% for 2000 and 2001, 60% for 2002 and
2003, and 100% for 2004 and thereafter - and the
carry-forward to five years. State law allows a limited
percentage to be carried forward up to 10 years
Starting with the forest fires in 1985, and 28 times
thereafter for various disasters, the Legislature enacted
measures that allow a 100% carry-forward of excess disaster
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losses for up to five years and a carry-forward of the
excess disaster losses under the above percentages for up
an additional 10 years.
THIS BILL enacts identical allowances for excess
disaster losses sustained in 18 counties: El Dorado,
Fresno, Imperial, Kern, Kings, Madera, Merced, Monterey,
Riverside, San Bernardino, San Diego, San Luis Obispo,
Santa Barbara, Santa Clara, Stanislaus, Tulare, Ventura,
and Yuba resulting from severe freezing conditions
commencing January 11, 2007.
PROPERTY TAXES :
EXISTING LAW allows counties to adopt ordinances
allowing taxpayers to apply for a reassessment of property
destroyed or damaged by "a major misfortune or calamity" if
the Governor proclaims a disaster. Taxes that had
previously been paid are deemed "excess" as a result of a
downward reassessment and are refunded to the taxpayer.
County assessors must defer the payment of property taxes
when they receive a timely filed application from an
affected taxpayer.
Beginning in 1990, the Legislature provided state
reimbursement of property tax revenue losses to local
governments resulting from the downward-reassessment of
damaged or destroyed properties for most disasters for one
year.
THIS BILL enacts identical provisions that require the
state to backfill local revenue losses resulting from the
reassessment of property resulting from severe freezing
conditions commencing January 11, 2007 in the Counties of
El Dorado, Fresno, Imperial, Kern, Kings, Madera, Merced,
Monterey, Riverside, San Bernardino, San Diego, San Luis
Obispo, Santa Barbara, Santa Clara, Stanislaus, Tulare,
Ventura, and Yuba
THIS BILL requires that each affected county certify
to the Director of Finance an estimate of the amount of
reduced 2005-06 property tax revenues resulting from
reassessment by September 30, 2007. The Director of
Finance then verifies and certifies the revenue loss
estimate to the Controller, who then sends the certified
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amount to the affected county. Before June 30, 2008, each
affected county must remit to the Controller any
overestimated balance. If the loss was underestimated, the
Controller must return the difference to the affected
county.
PROPERTY TAXES (HOMEOWNERS' EXEMPTION) :
EXISTING LAW provides a homeowners' exemption from
property taxes equal to $7,000 in assessed value (at a one
per cent property tax rate, the exemption reduces property
taxes by roughly $70) for owner occupied homes. Once
granted, homeowners' exemptions are generally permanent.
However, an Assessor may deny a homeowner's exemption if
the property becomes vacant or is under construction as of
the January 1st lien date.
THIS BILL provides that Assessors may not disqualify
an otherwise qualified residence for a homeowners'
exemption solely on the basis that the dwelling was
temporarily damaged, destroyed, under reconstruction by the
owner, or temporarily uninhabited as a result of restricted
access to the property due to severe freezing conditions in
the Counties of El Dorado, Fresno, Imperial, Kern, Kings,
Madera, Merced, Monterey, Riverside, San Bernardino, San
Diego, San Luis Obispo, Santa Barbara, Santa Clara,
Stanislaus, Tulare, Ventura, and Yuba commencing January
11, 2007.
FISCAL EFFECT:
Board of Equalization (BOE) estimates minimal
administration costs, and likely no cost to extend the
homeowners' exemption to homes that are uninhabitable on
the lien date. Additionally, BOE estimates minimal costs
to the state due to the state backfill of first-year
property tax revenue loss.
Franchise Tax Board (FTB) estimates insignificant
income tax losses of in FY 2006-07, and insignificant gains
in FY 2007-08 and 2008-09, due to accelerated claims on
amended returns.
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COMMENTS:
A. Purpose of the bill
According to the Author, "Currently, the law allows
non-business taxpayers to deduct uninsured losses, less
$100, to the extent the loss exceeds 10% of adjusted gross
income. Business taxpayers may use losses to offset
income. If losses exceed the year's income, 50% of the
remaining business losses may be carried forward to offset
up to 5 years of income.
When the President declares a disaster, taxpayers may
amend their prior-year returns and deduct the current
disaster losses against prior-year income. This allows
many taxpayers to receive a refund. In previous disasters,
legislation has allowed all taxpayers to carry forward 100%
of their excess disaster losses, instead of 50%, for 5
years.
Current law also allows for downward reassessment of
property damaged in a disaster. In previous disasters,
legislation has provided a one-year reimbursement to local
governments for the property tax revenues lost as a result
of the reassessment.
On January 12, 2007 Governor Schwarzenegger proclaimed
a state of emergency for ten counties that is experiencing
severe freezing temperatures and damaged crops. Since
then, the list of counties has expanded to 18. Policy was
passed in 1991 and 1999 to provide relief for farmers and
based on the severe conditions under this year's freeze;
steps should be taken to help out once again.
SB 114 provides income and property tax relief for
those who suffered losses as a result of the January 2007
freeze.
Specifically, this bill extends the same disaster
assistance to individuals, businesses, and local
governments which suffered losses as a result of the
January 2007 freeze. Individual and business taxpayers
could carry forward 100% of excess losses for 5 years.
Local governments would be reimbursed for one year for the
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property tax lost as a result of reduced assessments."
Typically, the state enacts legislation to reimburse
local governments for property tax revenue losses resulting
from reduced property values in the year following a
disaster. By providing relief for counties with taxpayers
who experienced losses attributable to the severe freezing
conditions that began on January 11, 2007, this bill
follows in that longstanding tradition.
B. Are the Changes to the Homeowners' Exemption
Necessary?
Revenue and Taxation Code 218 sets forth requirements
for the homeowners' property tax exemption, which is
required by California's Constitution. Assessors may deny
homeowners' exemptions if the dwelling is rented, vacant,
under construction as of the lien date, or is a secondary
or vacation home as of the lien date. Both this bill and
its predecessors ensured that Assessors could not deny
homeowners' exemptions solely because a disaster damaged or
destroyed a dwelling, necessitated reconstruction, or
rendered the dwelling uninhabited as a result of restricted
access.
While damage created by fires, floods, earthquakes and
mudslides could preclude a homeowners' exemption
disqualification under the above conditions, could a freeze
do enough damage to make this provision necessary? Even
if the possibility exists, BOE opined that an Assessor may
not deny a homeowners' exemption based on a temporary
absence from a dwelling for repairs due to a natural
disaster (Letters to Assessors 82/50, Question G16),
although that letter applies to one circumstance and does
not have the effect of statute or regulation.
Additionally, Assessors determine eligibility for
homeowners' exemptions based on conditions on the first of
the year, so exemptions would only be jeopardized based on
conditions on January 1, 2008, almost an entire year after
the freeze began.
That said, damage from frozen pipes could necessitate
significant repairs to a home, displacing taxpayers for
some time. Additionally, the bill only precludes Assessors
from denying a homeowners' exemption for the sole reason of
disaster-related causes. However, the Committee may wish
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to consider:
Approving the measure with the current
provisions intact.
Deleting amendments to Revenue and
Taxation Code 218.
Enacting a new statute of general
application and deleting provisions from code
relating to past disasters, thereby streamlining
the process and removing the need for
disaster-by-disaster legislation (See Below).
C. A Better Way?
The Legislature has amended Revenue and Taxation Code
218 seven separate times for seven separate disasters to
ensure that Assessors may not deny homeowners' exemptions
for disaster-related reasons. This year, SB 32 (Battin)
and AB 62 (Nava) seek to do the same.
Last year two bills, AB 3039 (Houston) and SB 1607
(Machado) attempted to change this statute to provide
statewide protection, thereby ensuring that future
disaster-specific measures were not necessary. The
Assembly Revenue and Taxation Committee held AB 3039, and
deleted the provision from SB 1607, which was subsequently
enacted. Additionally, the Governor directed the Office of
Emergency Services and the Office of Planning and Research
to work with the Legislature to enact standard purpose
legislation when he signed a disaster-specific bill (AB 18,
La Malfa, 2005). The Legislature has previously enacted
statewide legislation in response to a flurry of local
jurisdiction-specific bills, notably in the areas of
transaction and use taxes (SB 566, Scott, 2003), and
disputes over property tax allocation errors (AB 169,
Wiggins, 2001).
D. More To Come?
Losses due to the 2007 freeze currently exceed those
from the 1990 or 1997 freezes in total and for most
counties, according to California Department of Food and
Agriculture (CDFA) estimates. The Governor has requested
declaration of a major disaster for federal purposes for 31
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counties that suffered catastrophic losses. Because
federal and state criteria vary, the Governor has to date
declared states of emergency for the 18 counties currently
listed in SB 114. CDFA states that other counties may meet
the criteria for state purposes, but they have not yet
completed the process to determine eligibility. The
Department does not expect to be completely finished with
the designation process until later next month. The
Committee may see SB 114 again, after CDFA finishes
calculations that may render additional counties eligible.
E. Technical Amendment Needed
FTB states that the bill lacks a definitive period for
freeze related losses, which could lead to disputes between
taxpayers and FTB. The measure states that taxpayers may
claim excess disaster losses that occur in specified
counties commencing January 11, 2007. The Committee may
wish to consider a technical amendment to create a
definitive period for taxpayers to claim excess disaster
losses due to the freeze.
Support and Opposition (verified 2/23/07)
Support:American Federation of State, County, and
Municipal Employees; California Labor
Federation; Regional Council of Rural Counties;
California Farm Bureau Federation.
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Consultant: Colin Grinnell