BILL ANALYSIS                                                                                                                                                                                                    

                         Senator Robert M. Hertzberg, Chair
                                 2015 - 2016 Regular

          Bill No:                SB 35                                     
                    Hearing Date:       2/25/15
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              Subject:  Disaster relief:  Counties of Napa, Solano, and  

          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.   


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          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.  


          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  


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          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,  
                 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  


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               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 --


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