Schwarzenegger vetoes bill to lower taxes on short sales of homes

Governor Schwarzenegger vetoed a bill Thursday that would have given a tax break to Californians who sold their homes for less than what they owed on them.

Some Californians manage to strike deals with their banks to sell their homes for less than they owe on the mortgage. Banks agree to it to avoid foreclosures. The federal government doesn’t tax that forgiven debt. But California does -- It counts it as personal income.

Democratic Senator Lois Wolk of Davis sponsored a bill that would have conformed state law with the federal law. But the measure also included a provision to penalize businesses that knowingly underpay state taxes.

Schwarzenegger didn’t like that.

"Something that was supposed to be a tax benefit became a tax increase!" the governor said.

A couple weeks ago Schwarzenegger threatened to veto the bill unless lawmakers removed the tax fraud provision.

Senate leader Darrell Steinberg refused. "It’s merely collecting what is owed" He said.

For now, Californians who must sell their homes for less than they owe will continue to pay taxes on the forgiven debt.