"It doesn't seem to make sense that the 40k is taxable in California state tax."

Unless you find where it is explicitly exempt, it is taxable.

I don't understand why that makes no sense and unless your congressman or senator or representative is here, no one here has any control over this, anyway, and this isn't the place to debate it. The grant is already for low- to moderate-income folks who don't have much of a tax bracket anyway.