Corporations will immediately deduct, then exit

In addition to lowering the federal corporate net income tax rate dramatically, the TCJA provided immediate expensing benefits and substantial accelerated depreciation.213 Although simply a timing issue at the federal level, there are serious revenue implications at the state level, to the extent the state conforms.214 In the case of unincorporated businesses, the individual taxpayers could receive the benefit of full deductions immediately and then subsequently relocate. Unlike at the federal level, the departure state would not have the ability to tax the outsized income that is derived from the capital expenditures in future years. Any resultant income would be sourced to the state that generated the income or the individual’s new state of residence, even though the departure state allowed the individual a substantial deduction when they were a resident. In addition, if the asset is sold, the departure state would also forgo any depreciation recapture. The tax deficit related to this timing disjunction is nominal compared to the other situations described above, but it illustrates the compounding effect of states losing the ability to tax income that accrued within their taxing jurisdiction. The detriment is magnified because of the timing aspect: the state is not only giving a deduction against non-existent future income, but the state is granting the deduction immediately, so the state’s revenue is further eroded by the time value of money.