The Riggs Report: Punishing wildfire victims in California

December 14, 2017

Tax cut bill erases casualty loss deduction

There are a multitude of reasons why Gov. Jerry Brown and his administration have condemned the current tax cut bills being negotiated in a conference committee in Washington as especially harmful to California.

They include eliminating the state and local tax deductions used by one in three residents, hurting the ability to buy homes by capping the mortgage interest deduction and providing disproportionate tax relief for the wealthiest Californians.

But in a letter released Wednesday by Brown’s Director of Finance Michael Cohen, there is a nugget that takes this issue beyond the realm of accounting and crystallizes the argument that California is being treated unfairly.

Even as the Thomas Fire continued to burn on the eastern flanks of Santa Barbara, threatening approximately 18,000 homes and prompting mandatory evacuation orders in Carpinteria and Montecito, Cohen’s memo noted that the tax bill would prevent future wildfire victims from claiming deductions for their property losses.

More than 700 homes have been destroyed in Ventura and Santa Barbara counties since the Thomas Fire broke out last week near Santa Paula.

In October, more than 4,700 homes were destroyed in the Tubbs Fire in Sonoma County, much of that in the city of Santa Rosa. Insurance claims from the Sonoma County fires are reportedly now exceeding $9 billion.

None of those homeowners would be able to deduct for uninsured losses in future disasters, under language being negotiated, although it is always possible for Congress to approve special tax relief legislation.

That’s what happened earlier this year for victims of the hurricanes in Texas and Florida. Requirements for tallying losses were relaxed and victims were also allowed to withdraw 401K retirement funds without paying penalties.

“The repeal of the casualty loss deduction, starting in 2018 under the House and Senate bills, is an unnecessary step that will only compound the difficulty for the many thousands of Californians who either are or will be struggling to recover from devastating losses,” Cohen said in the letter addressed to the state’s congressional delegation.

The casualty loss deduction is “a way of providing relief to the victims of casualty losses both large and small,” Cohen said.

Under bill language being reviewed by the House-Senate conference committee, future fire victims could only claim deductions if the fire was large enough to be declared a federal disaster. In practical terms, that doesn’t happen very often.

Those damaged by smaller fires would be left without that kind of tax relief.

“Our tax code shouldn’t pick winners and losers in natural disasters,” Senators Dianne Feinstein and Kamala Harris said, in a joint statement.

But that is the consequence of the draft legislation in a state where natural disasters are as common as sunshine. Death and taxes may be predictable, but not tax relief for victims of those disasters.