Congress failed to pass federal tax relief for wildfire victim compensation, another blow for California survivors

Victims of the California wildfires covered by the Fire Victim Trust will continue to pay federal taxes on settlement payments, already long delayed and coming in at less than half what people are owed, after Congress declined to provide relief this year.

Efforts by Reps. Mike Thompson, D-St. Helena, Doug LaMalfa, R-Richvale, and other lawmakers to attach a bill providing tax relief on wildfire settlements to the $1.65 trillion spending package that passed through Congress last Friday were unsuccessful. The spending bill was Congress’ final legislative act this year.

For victims of recent wildfires sparked by Pacific Gas & Electric Co., including the 2017 North Bay fires, it marks the latest setback in what has been a long and painful wait for compensation.

“I don’t like it any more than (fire victims) do,” said Thompson, the North Bay’s senior congressman. “I’m going to do everything I can to try and fix it.”

Thompson and LaMalfa’s bipartisan HR 7305, introduced in March, sat in the House Ways and Means Committee until late fall while legislators and staff attempted to work out nuances with various departments and agencies, and, in the end, tried to pass it as part of the government funding package.

However, Senate Minority Leader Mitch McConnell blocked House lawmakers’ attempt by opposing the inclusion of any tax provisions in the spending bill.

U.S. Sen. Dianne Feinstein’s (D-San Francisco) companion legislation in the Senate also failed to move forward.

Proponents of carving out tax relief for the victims of PG&E sparked wildfires beginning with the 2015 Butte Fire and including the 2017 North Bay firestorm and the 2018 Camp Fire were unable to convince McConnell, a Republican from Kentucky, to include the narrow tax measure, Thompson said.

McConnell’s office did not return a request for comment before print deadline Thursday.

Thompson said he and his co-sponsors, which include North Coast Rep. Jared Huffman, D-San Rafael, intend to introduce the bill immediately in the new year. But, he said, relief is unlikely before fire victims begin preparing 2023 filings that include their settlement payments.

“It's appalling that after all this time an agreement could not be made between the House and Senate to deliver wildfire survivors financial relief from abusive taxes,” LaMalfa said in a news release. The Republican’s district includes Paradise, the town devastated by California’s deadliest wildfire, the 2018 Camp Fire that killed 85 people.

Fire victims are waiting to be made whole by a cash-strapped fund that allowed PG&E in July 2020 to emerge from bankruptcy free of additional financial obligations to the people who lost homes, livelihoods and loved ones during the string of catastrophic wildfires sparked by the utility giant’s aging and neglected infrastructure — a pattern the federal judge overseeing its 5-year probation likened to “a crime spree.”

The 2017 Tubbs Fire that devastated Santa Rosa and killed 22 people is included in the settlement, but Cal Fire did not deem PG&E liable for that fire and the matter has not been tried in court.

The fund, called the Fire Victim Trust, was supposed to equal $13.5 billion and was composed of half cash and half utility company stock. The company’s share price remained depressed until recently, however, meaning there has never been enough money to compensate people for the damages they’re owed.

The wait alone for fire victims — payments generally did not begin at all until 2021 — has generated immense financial and emotional hardship for those who saw homes and businesses burned to the ground.

At most, the trust is currently only making payments at 45 cents on the dollar, and some have received far less, even as PG&E’s stock begins to stabilize. On top of that, victims will now have to treat those payments as taxable income, spiking their federal tax bills and bumping some of them into a different tax bracket.

Victims should consult with accountants and consult tax guidance from the Internal Revenue Service posted to his congressional website (mikethompson.house.gov/pgefvt), Thompson said, since some existing provisions may significantly ease their federal tax bills.

“Some folks are going to find while they may be worried they’ll have to pay taxes, some of them won’t,” he said. He also encouraged victims with uncertainties about the tax code to contact his office.

“If people bring things to my attention, and we can get any clarity from the IRS, we will,” he said.

The bad news about the federal tax relief comes the same month the Fire Victim Trust administrators highlighted positive steps toward increasing the sums of money available for victims. Trust administrators sold another 60 million stock shares to raise $908 million in new cash for the fund on Dec. 12, according to a Dec. 15 news release.

Trustee Cathy Yanni also announced that the trust had resolved a disputed claim with Adventist Health, a sprawling faith-based health care corporation that at one point sought as much as $1 billion from the fund as The Press Democrat reported in November. The sum settled on by Adventist and the trust has not been made public.

A settlement represents a step forward for individual fire claimants even as the company walks away with a chunk of the fund. Because Adventist fought in court for rights withheld from other fire victims, the trust was required to maintain the company’s entire claim in reserve while it negotiated a resolution.

“It’s a great way to end the year,” Yanni said in the news release.

The trust has dispensed $5.84 billion in claims so far. Still, much uncertainty remains as to when or if victims will be fully compensated.

While the trust engaged in efforts to move the tax legislation through Congress this fall, some victims have criticized trust administrators and their lobbyist for beginning their advocacy well after a grassroots effort started by victims themselves over a year ago.

California lawmakers eliminated any state taxes on fire victim compensation through a bill Gov. Gavin Newsom signed in September.

“It’s very disappointing,” said Steve Hillman, a survivor of the Tubbs Fire. “It’s like a black cloud hanging over us.”

Hillman and his wife received a long-awaited portion of their total payout from the trust this year, but the installment will now add significantly to their tax bill and put the couple, who are retired and on a fixed income, in a different tax bracket.

They were counting on the payment to help them pay off a loan they took out while waiting on compensation. “Looks like that money, if we have enough, will have to be saved for the IRS,” Hillman said. “PG&E fire reparation money going to the federal government! Unconscionable.”

“Having lost our home and all our possessions, the fire is very much with us each holiday season. We obviously take it very personally,” said Ed Coletti, another fire victim who was forced to put a big chunk of the recovery money he finally received from the trust in 2021 toward taxes.

“I've never hated writing a check as much as the one for over $13,000 dollars during this past October,” he said.

Thompson said the nonpartisan Congressional Budget Office estimated his tax relief bill would take $637 million out of federal coffers. Though that figure was based on Fire Victim Trust settlement payment taxation, if passed, the legislation would have applied to future victims of wildfires paid out of settlement funds.

The price tag made it more difficult to include the bill in the omnibus package, Thompson said. “It’s a significant amount of money.”

Under current tax code, victims are also responsible for federal taxes on the portion of their settlements they must hand to attorneys as fees, Thompson said.

“The idea that fire victims would be taxed on that part of the settlement is pretty ridiculous,” he said.

Thompson tried to negotiate with McConnell to include language in the spending package relieving fire victims from paying taxes on just those fees, which can range as high as 30% of their already slim settlements, he said, but the Republican leader would not budge.

Removing the taxes on attorney fees carried a cost to the federal government of $20 million, Thompson said.

The $1.7 trillion spending bill that did pass funds the federal government for the coming fiscal year, with $858 billion in defense spending and $772.5 billion in nonmilitary spending. It also includes at least $38 billion for relief from disasters, including wildfires.

“Frustrated and forgotten are the words that come to mind,” said Richard Lane, a Tubbs Fire survivor who joined tax relief advocacy efforts early on.

“Having lost everything in the fire … you just want closure, and it seems like one hurdle after another that we can’t seem to get over.”

You can reach Staff Writer Andrew Graham at 707-526-8667 or andrew.graham@pressdemocrat.com. On Twitter @AndrewGraham88

You can reach “In Your Corner” columnist Marisa Endicott at 707-521-5470 or marisa.endicott@pressdemocrat.com. On Twitter and Facebook @InYourCornerTPD