Skip to main content Skip to Search Box
Summary Article: Taxation
from Encyclopedia of Politics and Religion

Taxation, or the revenue raised by the state to be used for governing, has many political implications. The taxing authority, whether local or national, must, for example, determine what kinds of taxes to levy and on which part of the population the burden will fall. Religion and taxation have a long, complex relationship that varies tremendously over time and place. While the focus here is on taxation in the United States, it is important to recognize that practices are different in other countries.

Historically, in nations with an established church (for example, the Anglican Church in Great Britain) the privileged church clergy, property, and services were supported by general tax monies. In many Roman Catholic countries the church itself owned large tracts of land from which it earned income by taxing residents. In France and Italy the majority of these territories were eventually seized by national governments (as had happened earlier in England when Henry VIII dissolved the Church’s monastic holdings in the late 1530s). Today church-state relations in these countries, including ownership of property and taxation, are governed by concordats—treaties between the Vatican and individual secular governments. As a general principle, religious property and donations are not taxed. (“The power to tax involves the power to destroy,” as John Marshall, chief justice of the United States Supreme Court, declared in 1819.)

Germany has a unique arrangement. People who register with a church (and one must be registered to receive religious services) are assessed a 3 percent tax by the federal government. This tax is then distributed proportionately back to various church organizations. In Islamic countries major mosques and religious shrines are supported by the respective states. There are often private mosques supported by wealthy individuals and groups of the faithful. Depending on the country, minority religions may be prohibited from owning property or severely restricted in a variety of ways.

The United States has the most complex tax system in the world, yet it has been successful in collecting taxes. A federal structure allows tax authorities to exist on national, state, and myriad local levels and gives each level the right to tax for more than one purpose. Tax policies are designed not only to raise revenue but also to discourage certain activities, such as alcohol or tobacco consumption, and to encourage other activities, such as charitable giving or organizing for voluntary community services. It is within this context that religion and taxes must be understood. Four major levies that affect religious institutions are property, income, Social Security, and sales taxes. Of these, property taxes are the oldest and most deeply established.

Property Taxes

Property taxes in the United States are exclusively the domain of local governments and are a major source of funding for schools, police, and emergency services, as well as for maintaining public roads, water supplies, sewage systems, and other infrastructure. From the beginning of the American Republic in the late eighteenth century, every state in the union has exempted religious institutions from payment of property taxes. Most states provide a constitutional basis for these exemptions. Others have simply made statutory provisions. As other voluntary organizations, such as men’s and women’s clubs, schools, hospitals, settlement houses, libraries, museums, and the like, bought or were given property, they, too, were granted tax-exempt status.

Individual states have minor variations in their exemption laws, but all have certain common features. Groups must apply for tax-exempt status, specifying the charitable or religious purposes for which the property will be used. Property must actually be used for these purposes, not merely owned by an exempt group (although there is usually a grace period of a few years if a church buys land with plans to erect a building). And, finally, if a property is used for commercial purposes (for example, rental of a parking lot), the church must pay both property and income taxes.

Reasons for granting these exemptions were rarely articulated. It was assumed that churches and other voluntary institutions provided valuable public services that otherwise might have to be provided at taxpayers’ expense. Legal experts observed that the power to tax effectively meant the power to control and that the need to maintain separation of church and state precluded any taxing authority over religious institutions. A few religious scholars argued that the Bible, the free exercise clause in the First Amendment to the U.S. Constitution (which prevents Congress from “prohibiting the free exercise” of religion), or both, required property tax exemptions. Although some citizens objected to tax exemptions for religious institutions, it was not until 1970 that anyone successfully brought the issue before the U.S. Supreme Court. The case was Walz v. Tax Commission.

Frederick Walz, a New York attorney, bought a vacant lot on Staten Island about half the size of a tennis court. After paying property taxes, he filed for a partial refund. He argued that tax exemptions on property used for religious worship amounted to a subsidy of religion by taxpayers, including himself, in violation of the establishment clause of the First Amendment, which also prevents Congress from establishing any religion. Walz focused precisely on property used for worship to sidestep any counterargument based on the social services provided by religious organizations and to differentiate them from other nonprofit organizations. The tactic did not work.

Chief Justice Warren Burger, writing for an 8–1 majority, held that the tax exemption was constitutionally permissible on three grounds. First, churches are part of a larger class of nonprofit, voluntary organizations, all of which are given equal treatment under the tax code. Therefore churches are neither advanced nor inhibited beyond what other nonreligious but similarly situated organizations are. Second, if states were to tax churches, civil servants would have to assess the value of the property, collect the taxes, negotiate disputes, and foreclose in the event of nonpayment. All of these activities could lead to an excessive entanglement between religious institutions and government. Finally, two centuries of allowing churches to remain exempt from taxation has shown that the practice does not lead to an established church.

The strongly worded opinion and large majority was a major setback for those who opposed religious tax exemptions. However, the Walz decision did not provide the constitutional protection many religious leaders had hoped to obtain. The chief justice’s opinion simply stated that an exemption did not violate the establishment clause. It did not go the extra step and declare that exemptions are constitutionally mandated.

In the mid-1990s this distinction and a general antitax atmosphere led several groups to urge repeal of tax exemptions for all nonprofit organizations, including churches. Most significant was an initiative put on the ballot in Colorado. Despite, or perhaps because of, massive publicity and support of powerful lobbies, the initiative was soundly defeated at the polls. This defeat has led most observers to conclude that even if property tax exemptions are not constitutionally mandated, they are supported by a substantial majority of voters and are not likely to be removed any time soon.

Income Tax

In 1913 the Sixteenth Amendment to the U.S. Constitution became law. It allowed the federal government to create an income tax. (Before the amendment took effect, Article I, sections 2 and 8, required all federal taxes to be proportional among states and population.) Federal tax law has developed into an extraordinarily complex set of statutes that provide a variety of exceptions and exclusions, often called loopholes, as well as different rates for different types of income. From its first draft legislation, however, Congress has consistently exempted religious organizations from paying income tax.

A series of changes culminated in the Internal Revenue Code passed in 1954. The relevant section, 501(c)(3), classifies charitable, religious, social, literary, and educational organizations that do not aspire to make a profit for the benefit of shareholders or owners as a single category for tax purposes. These groups are exempt from taxes if they meet certain requirements. Being recognized as a 501(c)(3) entity has two effects: it allows donors to give charitable contributions to the entity and take a deduction on their own income tax, and it allows the group to avoid paying any tax on its income. A 1969 amendment limited the latter effect so that religious organizations must pay tax on income from businesses not directly related to their charitable purposes.

No one has successfully challenged Congress’s right to legislate income tax exemptions for charitable and religious organizations. What has caused confusion and some litigation are two limitations put on religious and charitable groups: they cannot make a “substantial attempt to influence legislation”—that is, to lobby political leaders—or participate in political campaigns for candidates running for public office.

It is unclear what a substantial part of one’s activities might be. A rule of thumb has been 5 percent of one’s total operations, but the Internal Revenue Service has never adequately clarified this figure. Groups that wish to lobby (Friends Committee on National Legislation, American Civil Liberties Union, National Association for the Advancement of Colored People or NAACP, and Network, for example) will create companion 501(c)(4) corporations, often referred to as action organizations, to do the lobbying. These 501(c)(4) corporations pay no taxes, but contributions to them cannot be deducted from taxes. Americans United for Separation of Church and State is the most notable religious group to lose its tax-exempt status for excessive lobbying, but many religious scholars have complained about the chilling effect of this vague standard.

Neither the courts nor Congress has been sympathetic. In a 1973 appellate court case, Christian Echoes National Ministry v. United States, evangelist Billy Joe Hargis’s organization was denied a tax exemption by the Internal Revenue Service because the group supported conservative political candidates and lobbied intensely for an amendment allowing prayer in public schools. The Supreme Court refused to review the decision. An effort by Abortion Rights Mobilization and a coalition of twenty other pro-choice groups to sue the United States Catholic Conference and National Conference of Catholic Bishops because of their anti-abortion political activities fared no better, presumably because the latter carefully refrained from mentioning candidates by name.

How tenuous tax-exempt status can be is illustrated by Bob Jones University v. United States (1983). This fundamentalist Christian university had enjoyed 501(c)(3) status since its founding. In 1970 a federal district court issued an injunction prohibiting the Internal Revenue Service (IRS) from according tax-exempt status to private schools that practice racial discrimination. In 1976 the IRS revoked Bob Jones University’s tax-exempt status because, for religious reasons, it forbade interracial dating among its students. The Supreme Court, in hearing the case, reasoned that the government has a compelling interest in eradicating racial discrimination that substantially outweighs “whatever burden denial of tax benefits places on petitioners’ exercise of their religious beliefs.” The Court went further, noting that exempt organizations must provide some public benefit and that they may not violate established public policy. Clearly, designation as a 501(c)(3) tax-exempt entity is a legislatively mandated privilege, not a constitutional right, even for religious institutions.

Other Taxes

A 501(c)(3) organization may apply for exemption from state and federal sales taxes, although religious groups may not be singled out for either a tax benefit or a burden. Two Supreme Court cases have made this settled doctrine. In Texas Monthly v. Bullock (1989) the justices struck down a sales tax exemption provided solely to religious publications, ruling that it violated the establishment clause. A year later, in Swaggart Ministries v. California Board of Equalization (1990), the same justices ruled that a tax on the sale of religious goods and services by a religious organization did not violate the free exercise clause if the tax was uniformly applied to all retail sales and did not single out religious goods or services.

Social Security (Federal Insurance Contribution Act, or FICA) and unemployment (Federal Unemployment Tax Act, or FUTA) taxes have presented slightly different problems. A 1965 federal law exempts self-employed Amish and members of similar groups from payment of FICA taxes if such payment is contrary to their religious beliefs and they decline benefits on the same grounds. Self-employed is the operative word. An Amish carpenter, Edwin Lee, hired fellow Old Order Amish and refused to file quarterly reports or pay the employer’s half of the tax. A unanimous Supreme Court ruled in United States v. Lee (1982) that the government’s interest in maintaining the integrity of the tax system outweighed any burden on Lee’s religious convictions. Chief Justice Burger, writing for the Court, feared setting a precedent for other issues, for example, tax resistance by individuals opposed to war. Also, hiring other people borders on commercial activity, so the Court upheld the exemption but interpreted it narrowly.

Similarly, in a 1980 case the Court upheld an exemption from unemployment taxes that Congress had granted to churches and related organizations. In this case, Evangelical Lutheran Church v. South Dakota, a church school was permitted to decline to pay the unemployment tax. This decision also means that dismissed employees cannot collect unemployment compensation, though the Court held that legislative discretion would apply.

Finally, despite popular misconceptions, rabbis, ministers, and priests pay income and Social Security taxes just like other citizens. The only exceptions are members of religious orders such as Jesuits and Dominicans who take vows of poverty. If members of these orders work for a church organization or agency and their remuneration is under the control of the religious order, no taxes need be paid. If members work for a profit-making business, however, they must pay income and FICA taxes, although they may also claim a charitable deduction for the amount remitted to their religious order. In recent years, many religious orders have voluntarily paid the FICA tax for members who then qualify for Social Security benefits when they retire.

Taxation in the United States is complex and multilayered, leading to some litigation, but overall successful. The same may be said for the relationships between taxing authorities and religious organizations.

See also Constitution, U.S..; Freedom of Religion; Separation of Church and State.

Bibliography
  • Bittker, Boris I. “Churches, Taxes, and the Constitution.” Yale Law Journal 78 (1969): 1285–1310.
  • Kelley, Dean M. Why Churches Should Not Pay Taxes. New York: Harper and Row, 1977.
  • Miller, Robert; Ronald Flowers. Toward Benevolent Neutrality: Church, State, and the Supreme Court. 5th ed. Waco, Texas: Baylor University Press, 1997.
  • Monsma, Stephen V.; J. Christopher Soper. The Challenge of Pluralism: Church and State in Five Democracies. Lanham, Md.: Rowman and Littlefield, 1997.
  • Thomas, Oliver S. “The Power to Destroy: The Eroding Constitutional Arguments for Church Tax Exemption and the Practical Effect on Churches.” Cumberland Law Review 22 (1992): 605–635.
  • Weber, Paul J.; Dennis Gilbert. Private Churches and Public Money. Westport, Conn.: Greenwood Press, 1981.
Paul J. Weber
Copyright CQ Press © 2006

Related Articles


Full text Article Public Policy on Tax Exemptions for Nonprofit Organizations
Leadership in Nonprofit Organizations: A Reference Handbook

Public policy related to tax exemption defines the broad boundaries of the nonprofit sector. Nonprofit organizations do not pay income tax,...

Full text Article Bob Jones University v. United States
Encyclopedia of Law and Higher Education

The U.S. Supreme Court's 1983 opinion in Bob Jones University v. United States, Goldsboro Christian School v. United States , was a landmark...

Full text Article Bob Jones University v. United States (1983)
Encyclopedia of the First Amendment

The Supreme Court determined in Bob Jones University v. United States , 461 U.S. 574 (1983), that the Internal Revenue Service (IRS) may deny...

See more from Credo