BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular Bill No: SB 35 Hearing Date: 2/25/15 ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------- ----------------------------------------------------------------- Subject: Disaster relief: Counties of Napa, Solano, and Sonoma. Enacts disaster loss treatment and extends the deadline for taxpayers affected by recent earthquakes to carry back disaster losses to the 2013 tax year. Background and Existing Law Federal and state law allows taxpayers to apply losses to reduce taxable income from other sources. Disaster losses are the amounts not compensated by insurance or other means that result from fires, storms, floods or other natural events. Disaster losses must exceed $100 per taxpayer and 10% of their adjusted gross income for the year, but these limits don't apply to business or income-producing property. When the President declares a disaster, as he did for the earthquake that affected Napa and Solano Counties in August, 2014, the declaration triggers disaster loss treatment automatically for federal and state purposes for taxpayers in areas subject to the declarations. When the Governor declares, but the President does not, the Legislature must affirmatively enact disaster loss treatment, as it did most recently for fires in San Diego County in May, 2014 (AB 922, Maienschein, 2014). Federal and state law also allows taxpayers to apply losses to income gained in the future, called a "carry forward," or against past income, called a "carry back." Taxpayers can apply disaster losses in the current tax year or carry them forward, but because disasters often incur costs that cause immediate cash needs for taxpayers, state and federal law generally allow taxpayers to amend tax returns from the immediately preceding tax year to carry back a disaster loss, generating a cash refund on taxes paid the immediately preceding year. To apply the loss in the previous year, state and federal law require the taxpayer to amend their return by the next year's filing deadline, which is generally April 15th. However, while a Presidential declaration automatically extends the deadline for carrying back disaster losses for federal tax, the Legislature must affirmatively enact a statute doing so for state purposes. SB 35 (Wolk) 12/1/14 Page 2 of ? Because many taxpayers have not yet determined the amount of uninsured losses the earthquake created, the Author wants to extend the state deadline to allow taxpayers more time to claim disaster losses on their 2013 tax returns, and extend disaster loss treatment for state purposes to taxpayers in Sonoma County, who were not included in the President's declaration. Proposed Law Senate Bill 35 extends the deadline for taxpayers in Napa, and Solano Counties affected by the August, 2014, earthquake to claim disaster losses for the 2013 tax year from April 15, 2015 to the extended due date, conforming to federal law. The measure also allows disaster loss treatment for taxpayers in Sonoma County, who were not included in the President's disaster declaration. The measure also provides that any subsequent legislation that suspends, defers, reduces, or otherwise diminishes net operating loss deductions shall not apply to disaster losses claimed by affected taxpayers due to the earthquake. The bill also makes legislative findings and declarations justifying the measure's statewide public purpose. State Revenue Impact According to the Franchise Tax Board (FTB), SB 35 results in revenue losses of $1,000 in 2013-14, and gains of $500 in 2014-15 and 2015-16. Comments 1. Purpose of the bill . The purpose of the bill is to allow taxpayers that recently suffered from the August, 2014 Napa earthquake to apply losses to their tax returns filed the previous year, resulting in a tax refund which can immediately be used to rebuild and recover from the earthquake. The Legislature has enacted identical treatment for almost every significant disaster that has occurred in California for the last 25 years. Additionally, the measure expands state disaster loss treatment for state purposes for taxpayers in Sonoma SB 35 (Wolk) 12/1/14 Page 3 of ? County. 2. When disaster strikes . Starting with the forest fires in 1985, and approximately 51 times thereafter for various other disasters, the Legislature enacted disaster tax relief legislation. Previous disaster tax relief bills were much longer than SB 35 because they enacted three distinct provisions: homeowners' exemption, fiscal relief to disaster-affected counties, and disaster losses: Homeowners' Exemption. The California Constitution grants taxpayers an exemption on the first $7,000 of taxable value for their personal place of residence; however, state law provides that when a property is vacant, under construction, or no longer occupied by the owner on the lien date of January 1, the property is no longer eligible for the exemption. Previous disaster relief bills prohibit the assessor from revoking the exemption for property affected by each individual disaster, but the Legislature enacted a general protection for all taxpayers, negating the need for subsequent bills to prohibit the revocation (SB 1494, Committee on Revenue and Taxation, 2010). County fiscal relief. The California Constitution allows taxpayers to request the assessor to revalue property to its disaster-affected value until it's restored, reconstructed, or repaired. Disaster tax relief bills enacted a process for the state to reimburse counties for property tax revenue losses resulting from reassessments in the first fiscal year following the disaster; however, the Legislature has not enacted these provisions since 2010, choosing not to for the last three most recent disasters: tsunamis in Humboldt County in 2011, severe storms in Santa Cruz County in 2012, and fires in San Diego County in 2014. Disaster losses. While the Legislature consistently enacts disaster loss treatment for individual disasters, it will soon be rendered moot by the state's general loss treatment. In 2008, the Legislature enacted two-year carry backs for all losses, which allow taxpayers to apply losses from the current year to the previous two tax years, but the measure limited the percentage of the loss that taxpayers can claim in its initial two years, originally 50% of the loss for 2011, and 75% for 2012 (AB 1452, Committee on Budget). After the Legislature delayed carry SB 35 (Wolk) 12/1/14 Page 4 of ? backs for two years (SB 858, Committee on Budget and Fiscal Review, 2010), taxpayers are now allowed two year carry backs of 50% of 2013 losses, 75% this tax year, and 100% next year. Taxpayers will be able to carry back 100% of losses incurred in 2015 regardless of whether they were caused by a disaster, meaning that a bill that solely enacts one-year disaster loss carrybacks would provide inferior treatment. 3. Me too . SB 35 enacts disaster loss treatment for state purposes for Sonoma County. However, Sonoma County taxpayers can't apply disaster losses for federal purpose, as they were not included in the President's declaration, which applied only to Napa and Solano Counties. 4. Make it easy . Just as the Legislature has enacted general law to replace disaster-specific provisions described above, the California Taxpayers' Association and the California Society of Enrolled Agents are requesting that SB 35 be amended to provide that its amended return deadline extension for any President or Governor declared disaster. Doing so would negate the need for future disaster-specific legislation. 5. Amendment needed . FTB and committee staff recommends the following amendment: On page 3, line 5, strike out "allow" On Page 3, line 6, strike out "them to" Support and Opposition (2/19/15) Support : Counties of Napa, Solano, and Sonoma; California Professional Firefighters, Family Winemakers of California; City of Napa. Opposition : Unknown. -- END -- SB 35 (Wolk) 12/1/14 Page 5 of ?