A Valid Exemption

06-18-2023Pastor's LetterFr. John Bonavitacola

Dear Friends,

Whenever elections come around so do calls for revocation of the tax-exempt status of Churches. In fact some put it this way, “it’s time for the government to stop subsidizing the Churches”. Well tax exemption and subsidies are not the same thing by a long shot. And here is why.

For the founders of the US not taxing the property of the Church (remember income tax didn’t come along until the 20th century) was something that they brought with them from England. In many European countries there were official Churches, such as the Church of England, which gave the Church a quasi-governmental status. So why would the government tax itself? But beyond that as the Church and State became more and more disentangled the state saw the social impact of the Church as benefiting the common good. So things like education, hospitals, feeding the poor etc. that the Church did took the burden off the state. For governments to tax the Church would mean less of those services. So for government this was a win-win situation.

At this point we should be clear about what constitutes tax exemption. First religious organizations including Churches, synagogues, mosques etc. are tax-exempt because they are religious organizations by virtue of the First Amendment not because they are not-for-profit. The non-profit designation came along after the 16th Amendment in 1913 (income tax) became part of the tax code. All Churches are considered non-profits but not all non-profits are Churches. After the Income tax and Social Security Act things got very complicated and then in 1954 with the passing of the constitutionally dubious, Johnson Amendments which barred non-profits from endorsing or opposing political candidates (not political positions) things got even more convoluted. Since the 1930’s a federal court has issued rulings on who can be considered tax exempt and non-profit. That ruling has continued to be updated every year and the pages of that ruling I am sure would circle the globe. In a nutshell the Church’s income, mostly the donations from members and most but not all of Church property is exempt. The Church still pays all applicable licensing fees, sales tax (in many states including AZ), and all employees including clergy pay payroll taxes and income tax. In exchange for that exemption, Churches and non-profits must follow certain rules. First, most of the income must go to continuing the mission of the Church. Therefore, the Church can’t run a business with shareholders and pay dividends. The Church also must not engage in partisan politics, namely endorsing political candidates for office. The Church as well as other 501 (c) (3) non-profits can however lobby the government on policy issues or speak out on policy issues, but lobbying cannot constitute the majority of how a religious or non-profit organization uses its resources. So what would it look like if the tax-exempt status of the Church is revoked? For starters the Church could operate as a business or even start operating for profit enterprises. We do have lots of smart Catholics with business acumen that could make lots of money for the Church. The Church in Germany, though very few people are in the pews is extremely well off since the laws of that country don’t preclude it from investing and turning a profit. Loss of tax exemption would also free the Church to endorse candidates for office or even field candidates or start its own political party. Could you image if every bishop in the country asked Catholics to vote for a specific candidate? Even if only a third went along, that would certainly influence an election. And of course with that power the influence of the Church would greatly increase in politics. So loss of tax exemption might actually increase and not decrease the influence of religion in society. If the Church did have to pay tax on its income and land our ability to provide the social services that we now provide would be greatly diminished. Government would most likely fill the void. That means the government would need more tax money to do it. Those who call for the revocation of tax exemptions are usually not the ones donating to religious entities. Do they want to see their taxes increase? I am not sure that those who want to see the Churches lose their tax exemptions really understand what implications that would have for our society. However the IRS does. That is why in its entire history the IRS has only revoked the tax exemptions of less than a handful of Churches or religiously affiliated non-profits. Is it possible for the Church to lose its tax exemption? Yes. Is it probable? No. But then again considering the politicization of everything who knows how the winds will shift?

Love,

Fr. John B.