As it stands now, if a California business is proven guilty of “oppressive, fraudulent or malicious” misconduct and is ordered to pay punitive damages, that financial loss can be used as a tax write-off.

Assemblymember Mike Feuer (D-Los Angeles) said the loophole is the result of a federal law he sought to alter at the state level, though his bill, AB 1276, was defeated this week after no Assembly Republicans voted in favor.

“In a time when we’re calling on every resident of our state to sacrifice … it’s really [prudent] of us to ensure the taxes we oppose are fair,” Feuer said.

He said the legislation attempted to address a “huge issue across the country.” By maintaining the current federal law, California is allowing corporations to side-step responsibility for “despicable” actions, Feuer said, adding that AB 1276 would promote California’s business climate as fair.

The legislation would have been imposed only after a jury found “clear and convincing” evidence of misconduct. Feuer said 95 to 98 percent of such lawsuits never make it to court, and of the ones that do, only five percent result in punitive damages.

Since AB 1276 would require a tax code change, it needed the support of two-thirds of the Assembly in order to be ratified. Feuer said no Republicans voted for the legislation, “which is really a shame.”

“I think that’s outrageous,” he said, adding that the bill is “extremely important.”

Feuer said it was ironic that, at the federal level, former U.S. Sen. Judd Gregg (R-New Hampshire) had supported efforts to eliminate the tax deduction on the federal level. Gregg has denounced the law, calling it “absurd,” according to reports.

Feuer, who introduced the bill last year and witnessed a similar outcome, is termed out at the end of this year, so a future bill addressing the issue is uncertain. The Assemblymember has filed paperwork to run for Los Angeles City Attorney.