BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
50 (Hill)
Hearing Date: 3/17/2011 Amended: 2/18/2011 + as proposed
to be
amended
Consultant: McKenzie, Mark Policy Vote: G & F: 7-0
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BILL SUMMARY: AB 50 would provide 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, the bill would provide the
following state tax benefits, as if the federal government had
declared the San Bruno incident as a disaster:
1) Exclude 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) Allow 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.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Tax revenue decrease $300 $6 General
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Existing federal and state law provides that income for purposes
of taxation includes all income derived from any source, such as
wages, dividends, interest, capital gains, rents, and royalties,
unless specifically excluded, such as insurance payments.
Federal tax law (Section 139 of the Internal Revenue Code), 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.)
Page 2
AB 50 (Hill)
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 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. Absent the
federal declaration, these payments are taxable under both state
and federal law.
AB 50 would treat 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, the bill would allow taxpayers to exclude qualified
payments from income for state income tax purposes. The measure
also provides similar treatment for involuntary conversions
resulting from the disaster. Staff notes that affected
taxpayers would still have to pay federal taxes on these
payments. State tax liability is generally based on information
from the federal return, which may cause confusion and
inaccuracies when filing state tax returns. Providing income
exclusions for disaster related payments solely for state tax
purposes is precedential.
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.
The Franchise Tax Board estimates a General Fund revenue loss of
approximately $300,000 in 2010-11 and $6,000 in 2011-12 as a
result of the exclusions provided in AB 50. The estimate
assumes that the bill would apply to payments made on or after
the date of the explosion. Staff notes, however, that the bill
does not include specific language providing for favorable tax
treatment for payments made prior to the operable date of this
bill. The author offered to amend the bill in the Senate
Revenue and Taxation to apply to payments made on or after
September 9, 2010, but due to an expedited hearing schedule,
those amendments will be adopted in this Committee.