Thousands of Californians who sold their homes in short sales or modified their mortgages last year are facing the prospect of huge state tax liabilities.

That's because state lawmakers have not passed a bill to mirror federal tax relief for people who had mortgage debt forgiven in 2009.

Republican Gov. Arnold Schwarzenegger says he intends to veto the bill because Democratic lawmakers added an unrelated provision dealing with tax fraud penalties on big business. Democrats say they are simply conforming to federal tax rules signed by President George W. Bush.

According to the California Franchise Tax Board, conforming state law to the federal standard would help an estimated 16,000 people reduce their California taxes between 2009 and 2012.