New Mexico Taxes vs. Texas: A Detailed Comparison
An in-depth look at the distinct tax philosophies of New Mexico and Texas and how they create different financial outcomes for residents and companies.
Understanding a state’s tax landscape is important for financial planning or a potential move. This comparison explores the tax systems of New Mexico and Texas, two states with different approaches to revenue. We will explore income, sales, and property taxes in both states to clarify the financial implications for residents.
State Income Tax
Texas
Texas is one of the few states in the U.S. that does not levy a state income tax. This means wages, salaries, and other personal income are not taxed at the state level, which can be a significant draw. This policy aims to attract a robust workforce and business environment.
New Mexico
In contrast, New Mexico has a progressive state income tax system, meaning the tax rate increases as income rises. For the 2024 tax year, the rates for single filers are:
- 1.7% on income up to $5,500
- 3.2% on income between $5,501 and $11,000
- 4.7% on income between $11,001 and $16,000
- 4.9% on income between $16,001 and $210,000
- 5.9% on income over $210,000
These brackets are adjusted annually for inflation. New Mexico offers some tax benefits for retirees. Social Security benefits may be partially taxable depending on income, but an exemption is available for taxpayers over 65.
Sales Tax
Both Texas and New Mexico rely on sales taxes to generate revenue, but their rates and what they tax can differ.
Texas
The state sales tax rate in Texas is 6.25%. However, local jurisdictions, such as cities and counties, can impose additional sales taxes up to a maximum of 2%. This means the combined total sales tax rate in Texas can be as high as 8.25% in some areas. Texas provides exemptions for certain items, including most groceries, prescription drugs, and over-the-counter medications.
New Mexico
New Mexico has a Gross Receipts Tax (GRT), which functions like a sales tax but is imposed on businesses. Businesses pass this tax on to customers, so it functions like a sales tax for the consumer. The statewide GRT rate is 4.875%. Local governments can also add their own gross receipts taxes, so the total rate varies by location.
The combined rates in New Mexico can range from around 5% to over 9%. New Mexico’s GRT is broader than the Texas sales tax, applying to many services, but it also exempts items like prescription drugs.
Property Tax
Property taxes are a major source of local government funding in both states for services like schools and public safety.
Texas
Texas has some of the highest property tax rates in the country. There is no state property tax; instead, local entities like school districts, cities, and counties set their own rates. The average effective property tax rate is often around 1.8% or higher. Texas offers a homestead exemption, which reduces the taxable value of a primary residence, and has made legislative efforts to provide property tax relief.
New Mexico
New Mexico generally has much lower property tax rates than Texas. The state limits annual property value increases for tax purposes on residential properties, making taxes more predictable. The average effective property tax rate is among the lowest in the country. New Mexico also offers a homestead exemption and additional exemptions for veterans and seniors.
Overall Tax Burden and Conclusion
Considering all major state and local taxes provides a more complete comparison of the overall tax burden. While Texas has no income tax, its high sales and property taxes can result in a significant overall tax burden, especially for homeowners. A high-income renter may find Texas favorable, while a middle-income homeowner might face a higher tax bill.
New Mexico’s system is more balanced, with a progressive income tax, a moderate GRT, and low property taxes. This structure can be favorable for those with lower to moderate incomes and for homeowners.
Ultimately, the better choice from a tax perspective depends on an individual’s financial situation. Income level, homeownership status, and spending habits determine which state is more advantageous. Anyone considering a move should evaluate these factors to make an informed decision.