For a knee-jerk reaction, ask someone about to retire if he's interested in moving to a state with no income tax.

The answer will be immediate, passionate, and confident. Mere lack of a state income tax is enough to incite great interest.

In fact, unless you expect a hefty retirement income, you should pay more attention to the local real estate tax than the state income tax.

Why?

Because a high real estate tax can make a state with no income tax more expensive than a state with income taxes.

Surprised?

I was.

Then I talked with two Native Texans who were drawn to Austin but tempted by Santa Fe, N. M. While homes in both places are expensive by Southwest standards, the most immediate expense difference is the stiff income tax in New Mexico. It tops out at 8.5 percent of taxable income over $64,000.

In spite of that, the tax burden for retirees can be lower in New Mexico than in Texas. Real estate taxes make the difference.

Real estate taxes run a bit over 2 percent of market value in Texas. Taxes on a $300,000 house would be something over $6,000 a year. In New Mexico, one of the lowest real estate tax areas in the country, taxes are about  ½ of 1 percent of market value. The same $300,000 house would have a $1,500 tax bill.

The $4,500 a year difference will pay a lot of income taxes.

Indeed, the tax on $64,000 of taxable income is "only" $3,644 in New Mexico. Since the standard deduction and personal exemptions for a joint return already eliminate taxation of $12,950 of income, you can have income well over $73,000 in New Mexico before your tax burden will equal the tax burden on a comparable Texas homeowner.

Bottom line: in terms of tax burden, most people would be better off retiring to high income tax New Mexico than no income tax Texas.

To explore further, I went through my copy of "Tax Heaven or Hell: a Guide to the Tax Consequences of Retirement Relocation." Published by Vacation Publications in Houston, the book compares total tax expenses in 149 cities and towns distributed around all 50 states. The publication also calculates the tax burden at three different levels of income and shelter expense. The comparisons top out with a $68,000 income and a home valued at $250,000.

The table below compares four locations, all with relatively expensive real estate. Three are in high income tax states--- California, Massachusetts, and New Mexico and one is in Texas. All these figures assume a $250,000 house and a retirement income of $68,098 a year. (At lower incomes, the sales tax and state income tax burden falls so the comparisons would "tilt" toward the income tax states.)

Comparing Retirement Tax Burdens in Different States

(Total taxes in four locations, based on a $68,098 income and a $250,000 house.)



Location Property Tax and other fees Personal Property tax and auto fees Sales Tax State Income Tax Total
Austin, TX $4,914 $125 $1,762 $0 $6,801
Santa Fe, NM $1,404 $ 80 $1,675 $2,810 $5,969
Cape Cod, MA $2,936 $186 $ 986 $2,905 $7,013
Palm Springs, CA $2,940 $588 $1,707 $1,669 $6,904

Source: Tax Heaven or Tax Hell, 1996

No standardized calculation like this is perfect, of course. For one thing, you might get a very different house for $250,000 in Austin or Santa Fe than in Cape Cod or Palm Springs. (Readers who would like to search for retirement spots with consideration of taxes and a multitude of other factors should visit www.money.com/bpretire .)

But one message is very clear: with no income tax, Austin, Texas is within $200 of Cape Cod, "Tax-achusetts" and Palm Springs, Calif. We can't say that a state without an income tax is Tax Heaven.