The legislation, which cleared a Senate committee Wednesday, would revoke a non-profit's exemption from state taxes if that organization excludes members by sexual orientation, gender identity or religious affiliation, the Los Angeles Times reported Thursday.
Supporters have said the bill is aimed at the Boy Scouts.
"Unfortunately in California, some organizations are out of step with state law and regularly discriminate," state Sen. Ricardo Lara, a Democrat and author of the bill, testified before the Senate Governance and Finance Committee. "The most egregious violator is the Boy Scouts of America."
The Boy Scouts of America has been under pressure for years by LGBT advocates to change its policy. Since 2010, BSA leaders voted twice to retain the policy despite boycotts by corporate donors and censure by politicians and celebrities.
Officials said California would be the first state to pass a law that would pull tax exemption because of an organization's exclusion of gays and transsexuals, the Times said. The legislative effort has drawn opposition from religious and conservative groups, which called it an unconstitutional abuse of power.
Under the bill, Scout groups raising money through events such as Christmas tree lots would have to pay taxes on the proceeds.
"You are talking about taxing revenue that is very important to the local Scout troop or pack," Rick Cronk, a Boy Scouts of America executive committee member from California, testified Wednesday.
Cronk said a change to the BSA's "don't ask, don't tell" policy is being considered. The organization's national council is scheduled to meet next month in Texas to consider it.