Kulo’s Kash: New Mexico Still Taxes Tips — And Most Workers Probably Don’t Know It

New Mexico loves to talk about affordability. It gets said in press releases, campaign speeches, and Roundhouse talking points like it’s holy scripture. But when a targeted tax break for tipped workers actually made it to the governor’s desk, Santa Fe said no.¹²

That is the story.

The federal government enacted a temporary “no tax on tips” deduction in 2025, allowing eligible workers to deduct up to $25,000 in qualified tip income on their federal returns for tax years 2025 through 2028.³ But New Mexico did not adopt a matching state exemption, which means tipped workers here can get federal tax relief and still owe New Mexico income tax on the same money.¹³

That is not just a tax-policy footnote. That is a real-world paycheck issue for people already living close to the edge.

Under state and federal labor rules, tipped workers in New Mexico can still be paid a cash wage as low as $3.00 an hour, with tips expected to bridge the gap to the minimum wage.⁴⁵ In plain English, tips are not some casino bonus for many servers, bartenders, and hospitality workers. Tips are rent money. Tips are gas money. Tips are grocery money.

So when New Mexico says it wants to help working families, but keeps taxing income that is this essential to low-wage workers, people are right to ask whether “affordability” is a slogan or a priority.

The policy vehicle already existed. Senate Bill 285 would have exempted tips from New Mexico state income tax, and it passed the Legislature in 2025 before failing to become law.¹² The state’s concerns were mostly about revenue loss, enforcement, and fairness between tipped and non-tipped workers. Those are not crazy concerns. But they are also not fatal ones. The estimated revenue hit was relatively modest in the context of a state budget measured in the billions, and New Mexico has already shown it can selectively conform to — or decouple from — federal tax provisions when it wants to.⁶⁷

That is why this issue matters beyond restaurant workers. It exposes a leadership habit: celebrate affordability in public, then veto or bury targeted relief when the machinery of government gets nervous about administration.

And here is the other problem: I do not think the public was clearly told what happened.

There was some media coverage. New Mexico Political Report covered the state debate over taxing tips in early 2025.⁸ KOB ran a 2026 tax-season story explaining that tips are now deductible federally.⁹ The Albuquerque Journal also covered 2025–26 tax changes.¹⁰ But that is not the same thing as a loud, repeated, plain-English warning to tipped workers that federal yes does not mean state yes.⁸⁹¹⁰

How many New Mexicans heard “no tax on tips” and reasonably assumed that meant no tax on tips, period? That confusion is predictable, and leaders should have anticipated it.

So here is the recommendation for the next governor and Legislature:

Pass a revised no-tax-on-tips bill. Use the federal definition of qualified tips and the federal income caps so the relief stays targeted.³⁷
Add reporting guardrails. If the state is worried about abuse, require employer certification through W-2 reporting instead of killing the policy altogether.⁷
Issue a plain-language tax notice. Until state law changes, Taxation and Revenue should say it clearly: federal deduction, state tax still applies.⁹¹¹
Treat this as workforce policy. Restaurants, hospitality, and tourism are major employers in New Mexico. Letting workers keep more of what they already earned is not a handout; it is retention policy.⁵¹²

That is the part that bothers me most. New Mexico is often comfortable using public money to clean up problems after people fall behind. But when workers are already doing their part — showing up, serving tables, working weekends, earning their tips one customer at a time — the state suddenly becomes very cautious.

Real leadership is not just distributing aid after the damage is done. Real leadership is removing pressure before working people break.

If affordability means anything in New Mexico, it should mean this: **stop taxing the survival income of people already on the job.**¹³

Kulo out.

Endnotes

SB 285 was introduced in the 2025 session as legislation to exempt tips from New Mexico income tax. nmlegis
The bill passed the Legislature but did not become law in New Mexico. nmlegis
The federal “no tax on tips” provision allows eligible workers to deduct up to $25,000 in qualified tip income for tax years 2025–2028; New Mexico did not automatically conform to it. rsmus
Federal labor guidance lists New Mexico’s tipped cash wage at $3.00 per hour. dol
New Mexico tip-law guidance also reflects the tipped wage structure and hospitality context in the state. 7shifts
Governor Lujan Grisham signed New Mexico’s 2026 budget and tax package, showing the state was actively making tax-policy choices this cycle. governor.state.nm
New Mexico addressed parts of the federal tax package selectively rather than adopting everything automatically, showing targeted conformity is possible. rsmus
New Mexico Political Report covered the state debate in “Is it time to stop taxing tips?” in February 2025. nmpoliticalreport
KOB published a March 2026 story on new tax deductions, including the federal tip deduction. kob
The Albuquerque Journal also ran tax-season coverage for New Mexicans in early 2026. abqjournal
New Mexico tax materials emphasize that state taxable income depends on New Mexico law, not automatically every federal deduction. aarp
Albuquerque Journal coverage in 2025 and Rep. Gabe Vasquez’s 2025 statements show the issue was framed as worker relief and affordability. abqjournal
Because New Mexico still taxes tips at the state level, workers can receive the federal break while still owing state income tax on the same tipped income. nmlegis