Oregon wildfire victims face huge tax bills on PacifiCorp settlements; Congressional fix is stuck

Story by Oregon Live.

The disaster tax relief only accounts for about $5.5 billion of the bill’s $70 billion cost. “We don’t have time for people to play politics with the victims. We’re simply out of time.”

A bipartisan bill that would exempt wildfire settlements from federal taxation is now mired in election year politics that could leave hundreds of Oregonians facing massive tax bills on the settlements they’ve received from PacifiCorp after the devastating 2020 wildfires.

That number could grow to more than a thousand in Oregon, as the fire litigation against the state’s second largest electric utility continues, and tens of thousands nationally who have lost property in utility-caused fires and other disasters.

The federal stalemate comes after the Oregon Legislature unanimously passed a bill during this year’s short session to exempt those settlements from state taxation.

Ironically, it is Oregon Sen. Ron Wyden, chair of the Senate Finance Committee, who is blocking the disaster tax relief as he tries to force a vote on a broader tax package he co-wrote that includes the same provisions.

For victims, the financial consequences of Congressional inaction would be devastating, they say. As it stands, the federal government taxes victims on the entire amount of any settlement or jury award as ordinary income. That includes a substantial portion they never see: the 25% to 40% cut that typically goes to their attorneys. And due to a change in tax law passed during the Trump administration, victims who aren’t filing business returns can’t deduct those attorney’s fees from their settlement income.

Last year, PacifiCorp reached a $299 million settlement with victims of the 2020 Archie Creek fire in Southern Oregon, an average of nearly $646,000 per individual plaintiff. And juries in Multnomah County have so far awarded nearly $220 milllion to 36 plaintiffs, an average of about $6 million each, in an ongoing class action suit trial in which the company was found liable for another four fires in Oregon on Labor Day 2020.

Damage awards for more than 1,000 additional plaintiffs in that suit are still being hashed out in mediation, and failing that, an ongoing series of mini trials. PacifiCorp has appealed the previous verdicts and has yet to pay those judgements while the appeal is pending.

Settlements of that size, however, will push many victims into the highest federal tax bracket of 37%. That means victims, many of whom are still reeling financially as they look to rebuild and get their lives back on track, could end up with as little as 25% of the gross amount they are awarded by a jury or in mediation. Meanwhile, attorneys are also required to pay taxes on the settlement fees, so those fees are taxed twice.

Like many residents who lived along the North Umpqua River east of Roseburg, Cheryl Niquette, 69, and her husband Jerry Schwartz, 83, lost virtually everything they owned in the Archie Creek fire: a jewel box home they’d built themselves, seven outbuildings, an airstream trailer, artwork, equipment and timber.

Cheryl Niquette and Jerry Schwartz’s former home that burned in the Archie Creek fire. They lost the house, seven outbuildings and virtually all their possessions in the Labor Day 2020 fire. They now face a massive tax bill on the settlement they received this year from PacifiCorp fire. Photo courtesy Cheryl Niquette and Jerry Schwartz

Nearly four years after the fire, they are just beginning to rebuild their shop with the proceeds of the settlement they received from PacifiCorp earlier this year. Inflation in labor and building materials and the extra expense of restoring their fire-ravaged, 11-acre property means that money won’t come close to paying for what they lost.

Niquette says their settlement was already a compromise. And the fact that the federal government is set to tax it at 37% is “unconscionable.” If that happens, they won’t have enough to rebuild a home there, she said.

“This is everything to us,” she said. “It helped a little that we got the state to back off, but everyone is just waiting to get relief from the feds. That’s the big chunk. They’re treating this settlement like it’s a lottery win. It’s not. Nobody got back what they lost.”

Advocates have been lobbying for the tax code changes for several years, and it was included in a broader tax package that passed out of the House in January. That legislation also included new deductions for research and development expenses and an expansion of the widely popular child tax credit that would make the full credit available to lower income families who can’t utilize portions of it today.

The latter proved a sticking point for Senate Republicans, who aren’t eager to move any bill that helps Democrats. They argue – and critics say it’s a specious claim – that the expanded child tax credit would cause parents to drop out of the workforce and make it another welfare program. As a result, the tax relief bill has been sitting in the Senate now for four months with no action.

In the interim, Rep. Greg Steube, R-Florida, whose constituency includes victims of 2022′s Hurricane Ian, decided to take up the disaster relief issue separately. He stripped them out of the larger bill and successfully used an unusual maneuver called a “discharge petition” to bring a standalone bill to a vote on the House floor after obtaining 218 signatures from voting members. That bill passed this week and is headed to the Senate, where it needs a two-thirds majority to pass.

Sen. Mike Crapo, R-Idaho, is the Senate minority leader who could step into Wyden’s position if Republicans regain control of the Senate in November. He has withheld Republican support for the broader package and resisted Wyden’s efforts at compromise. But he is not opposed to moving Steube’s stripped down version.

Wyden, however, is now blocking that bill, hoping to force a floor vote on the broader package. His spokesperson, Hank Stern, said in an email that Wyden strongly supports the disaster relief provisions in his own bill, but is “working to achieve those protections for wildfire survivors without abandoning kids, families and small businesses.”

Advocates say they understand Wyden’s frustration and reluctance to move the legislation’s disaster tax relief separately. But they say they’ve been working for years to educate members of Congress and get help for disaster victims, some of whom have been waiting for years for any monetary relief, and now face tax bills that will leave them with a fraction of their losses.

Jennifer Gray Thompson is chief executive of After the Fire USA, a California-based nonprofit that works with communities recovering from wildfire. She said the California wildfire victim’s trust established after Pacific Gas & Electric’s bankruptcy is underfunded and only paying victim’s a 65% share of their damage claims. Taxes eat a substantial chunk of those settlements. Meanwhile, the payouts have temporarily boosted some victims’ taxable income to the point where they lose medical benefits, scholarships for their children and other federally funded payments.

“We appreciate why Sen. Wyden is reluctant to move that part of the bill, but we’re also the smallest part of the bill (financially) with the most emergency need,” she said, adding that the disaster tax relief only accounts for about $5.5 billion of the bill’s $70 billion cost. “We don’t have time for people to play politics with the victims. We’re simply out of time.”

Back in Roseburg, Niquette says she’s deeply disappointed that Wyden is holding out on immediately moving the disaster tax relief in hopes of getting a larger package passed.

“Any win is better than no win,” she said “He should be looking out for us. I’m shocked. We need to get something rather than nothing. If his holdout doesn’t pay off, we all lose.”