Political fighting again stalls federal tax relief efforts for California wildfire victims

The screeching halt to the House of Representative's work this week marked the latest setback to legislation that would have provided federal tax exemptions for settlement payments for victims who lost lives, homes and businesses in blazes sparked by Pacific, Gas and Electric Co.

Victims have advocated for a bill to ensure the Internal Revenue Service doesn't treat significant portions of their damage compensation as income. So far, the bipartisan effort spearheaded by California Reps. Mike Thompson, D-St. Helena, and Doug LaMalfa, R-Richvale, has failed to pass. The first attempt at the bill was rejected by Senate Republican leadership at the end of 2022, and this year's versions remain in limbo.

Fire victims waited years to receive payments from the Fire Victim Trust, a fund established out of PG&E's bankruptcy to pay people for their losses in the face of devastating wildfires, including the 2017 North Bay firestorms and the 2018 Camp Fire. That fund, however, has so far only been able to pay victims at 60% of what they're owed.

The lack of tax relief legislation has led to yet further losses, as victims who have struggled to rebuild their lives face steep tax bills after trust payments in some cases thrust them into higher tax brackets. Those payments can also potentially put health insurance and other benefits in jeopardy.

This year, victims anxiously eyed an Oct. 16 tax deadline — following an extension applied to California counties hit by flooding and severe winter storms at the start of 2023 — while waiting for the House to act on a revised version of the legislation. They finally saw their chance on Oct. 4, when the House Ways and Means Committee scheduled a vote on the bill that was widely expected.

Then came Tuesday's stunning and historic vote to oust McCarthy.

The House Republican Caucus, beset by infighting and without a clear path forward, sent its members home shortly afterward, postponing the committee hearing.

Thompson and LaMalfa on Wednesday told The Press Democrat they now intend to ask the IRS to extend the tax deadline for the winter storm-impacted California counties until April.

"Tax relief for wildfire survivors is my top priority," said Thompson, who joined his party colleagues in voting to oust McCarthy.

"I am working closely with Rep. LaMalfa, and Ways and Means Chairman Jason Smith (R-Mo.) to ensure that consideration of our bill is done as soon as possible," Thompson said in a statement.

According to an aid for LaMalfa, the IRS is able to award a year's extension to tax deadlines for counties affected by a natural disaster. So far, the agency has only awarded a six-month break to the California counties that were labeled disaster zones over the winter. The congressmen said they will ask the IRS to add another six months.

LaMalfa is a Republican whose northern California district includes the town of Paradise, which was devastated by the Camp Fire in November 2018. He voted to keep McCarthy in office.

"It's really frustrating that survivors are still in taxation limbo," he said in a statement provided by his office. "It's also really frustrating that when the Ways and Means Committee was finally going to markup the bill to exempt relief payments from federal taxes, House operations are completely upended and we can't do what we're elected to do."

The long wait has caused some wildfire survivors to lose patience and faith.

Steve Hillman, a 2017 Tubbs Fire victim, hasn't been tracking the tax relief legislation lately. "I just gave up thinking it would ever pass," he said.

He paid his taxes in April, shelling out roughly $40,000 in federal taxes and estimated tax payments for next year. He didn't want to take any chances, he said, after his confusion over the process last year ended with him paying a $2,000 fine.

Hillman said he's emailed LaMalfa's and Thompson's offices in the past, but "you just get the canned responses." While he hopes the bill passes and he can file amended returns, he isn't holding his breath after being disappointed before.

"It's disheartening," Hillman said. "You'd think it'd be a no-brainer."

While some tax provisions can reduce liabilities for disaster victims, as outlined by the IRS in response to a request from LaMalfa, the process is complicated and victims have sought more sweeping certainty.

Will Abrams, a Tubbs Fire victim who has become an advocate in several arenas, including for the tax legislation, said he wanted lawmakers to push harder to pass the bill.

"I do not understand why just because there is not a Speaker of the House, the Ways and Means Committee is not able to just meet and vote on this," he said, accusing lawmakers of taking a vacation after ousting McCarthy. "I'm pissed off, but it's par for the course," he said.

Whether victims pay taxes on their settlement payments reverberates beyond their individual bank accounts into neighborhood streets that in some cases have seen stalled rebuilds. Local economies could also benefit from an infusion of settlement payments, Abrams said.

"What is going to be the reaction of victims if this doesn't get done this year?" he asked. "There's going to be swaths of people who are really upset at the lack of commitment around these types of issues."

After the first federal tax relief bill, introduced in March 2022, failed at the end of last year, LaMalfa and Thompson introduced a new version in January. That bill was then held up for months in committee, leading legislators to introduce yet another iteration at the end of July.

The latest version of the bill would provide tax relief on settlement payments related to wildfires occurring after Dec. 31, 2019, up until Jan. 1, 2026.

It would also cover payments made by either railroad companies or the government in the case of February's train derailment in East Palestine, Ohio.

From the beginning, fire victims have been fierce advocates for the legislation, sending thousands of letters of support to congressional members, organizing meetings with bill sponsors' staff and heading to Washington, D.C. in February and then again this fall to press the importance their cause.

In the delegation's most recent trip to Washington, victims focused on urgency during their conversations with lawmakers, according to Jennifer Gray Thompson, CEO of After The Fire USA, a nonprofit that organized the lobbying trips.

"This is us negotiating at the cliff wall," Gray Thompson told The Press Democrat after the visit in late September, speaking as a looming government shutdown threatened to further delay the tax legislation. "Fire survivors are caught in a culture war. It's very frustrating because we need these people to govern," she said, "I don't care what their politics are."

While that crisis was narrowly averted with a temporary spending bill to keep the government open, the bill's timing is now yet again in flux, depending on when a new speaker is seated and whether they're open to bipartisan efforts.

Still, Gray Thompson on Wednesday said she remains confident about the bill's prospects and that advocates will be pushing harder than ever to keep the bill on track. "I've yet to sit in a meeting and not have (a legislator) voice support," she said. "The issue is political will. Are they willing to spend the political capital?"

Even with missing the October 16 extended deadline, timing is still crucial. Fire victims can only file three years worth of amended tax returns, not to mention the accumulating fees that may accompany the process.

Brad Sherwood, a 2017 Tubbs Fire survivor, co-founder of the Larkfield Resilience Fund and assistant director of the public agency Sonoma Water, said the "energy behind the legislation" and the "devotion and dedication from the wildfire community" are still there.

"This wildfire survivor club of ours continues to grow. One of our main missions is we want to pay it forward so that others that find themselves in our shoes at least have it a little easier to recover," Sherwood said.

"This only makes us stronger. That's one of the things about wildfire survivors, we're used to being challenged. We've been to hell and back through our various wildfires and rebuilt. There's no going back. There's only moving forward, and we'll keep marching forward as long as we have to."

You can reach "In Your Corner" Columnist Marisa Endicott at 707-521-5470 or [email protected]. On Twitter @InYourCornerTPD and Facebook @InYourCornerTPD.

You can reach Staff Writer Andrew Graham at 707-526-8667 or [email protected]. On Twitter @AndrewGraham88.

___

(c)2023 The Press Democrat (Santa Rosa, Calif.)

Visit The Press Democrat (Santa Rosa, Calif.) at www.pressdemocrat.com

Distributed by Tribune Content Agency, LLC.