Keith Mack
The religious tax exemption law in the United States has a long history, dating back to the early days of the country's establishment. The First Amendment prohibits the government from favouring religious institutions, yet tax exemptions for religious entities have been a longstanding practice. The federal legislature has historically exempted religious entities from the national tax base, and today all 50 states and the District of Columbia provide various types of property tax exemptions for religious organizations. The rationale for these exemptions has been justified by the Supreme Court and individual state courts, with the understanding that these exemptions encourage the beneficial secular effects of religious organizations while avoiding excessive government entanglement in religious affairs. While the specifics of these exemptions have evolved over time, the fundamental principle of religious tax exemption remains a defining feature of the tax landscape in the United States.
| Characteristics | Values |
|---|---|
| Date of law | 1970 |
| First Amendment | "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof..." |
| First Amendment rationale | To encourage the beneficial secular effects of religious organizations while avoiding concerns of excessive government entanglement and establishment of religion |
| Supreme Court Justice opinion | Tax exemptions are constitutional because the benefit conferred was incidental to the religious character of the institutions concerned |
| Exemption rationale | The exemption applied to a broad category of associations dedicated to social betterment, including museums, hospitals, libraries, charitable organizations, and professional associations |
| Previous status | Unofficially exempt until 1894 due to social customs |
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What You'll Learn
Religious tax exemption law history
The history of religious tax exemption laws in the United States goes back to the country's early days. Since the birth of the US government, every state and the District of Columbia have provided tax exemptions for religious institutions.
Before the establishment of the country, early settlers without a governmental framework created charitable organisations and "voluntary" associations, including schools and churches. These organisations developed a long-standing relationship with the government, which recognised their importance and supported them through tax exemptions.
In 1894, Ulysses S. Grant considered taxing religious institutions but faced harsh criticism. Prior to 1950, tax-exempt organisations were exempt from income earned from both their mission-based activities and unrelated commercial business activities. The Revenue Act of 1909 granted tax exemption to corporations or associations operated exclusively for religious, charitable, or educational purposes, with no private inurement. The Revenue Act of 1917 established an individual income tax deduction for contributions made to tax-exempt organisations, encouraging charitable giving as income tax rates rose to fund World War I. The federal government has exempted churches and religious organisations from federal taxation since the ratification of the Sixteenth Amendment in 1913.
In 1970, a unanimous Court decision in Walz v. Tax Commission of the City of New York upheld state exemption from property taxation for property used exclusively for religious, educational, or charitable purposes by non-profit organisations. Chief Justice Burger clarified that the exemption was not to single out churches but applied to a broad category of associations dedicated to social betterment. This decision was based on Justice Brennan's pre-1970 rationale that tax exemptions were constitutional as the benefits were incidental to the religious character of the institutions.
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Religious tax exemption Supreme Court rulings
The history of religious tax exemption laws in the United States goes back to the birth of the country and the establishment of the government. The First Amendment prohibits the US government from favouring religious institutions, yet every state and the District of Columbia provide for tax exemptions for religious institutions.
The first comment on the matter by a Supreme Court Justice prior to 1970 was by Justice Brennan, who deemed tax exemptions constitutional because the benefit conferred was incidental to the religious character of the institutions concerned. In 1970, a nearly unanimous court sustained a state exemption from taxation of property used exclusively for religious, educational, or charitable purposes.
In Walz v. Tax Commission of the City of New York (1970), the Supreme Court, in an 8-1 plurality decision, upheld the tax exemption for religious institutions. Chief Justice Warren Burger would later draw upon this case when announcing the Lemon test in Lemon v. Kurtzman (1971) to decide when governmental actions violated the establishment clause. In Texas Monthly Inc. v. Bullock (1989), the U.S. Supreme Court applied the Lemon test to consider the constitutionality of a Texas statute.
In Branch Ministries v. Rossotti (2000), the Court of Appeals for the D.C. Circuit upheld the Internal Revenue Service's revocation of the tax-exempt status of a church that had engaged in political campaign activity, in violation of the Johnson Amendment.
In Catholic Charities Bureau v. Wisconsin Labor & Industry Review Commission, the U.S. Supreme Court allowed tax exemptions for Wisconsin religious charities, disagreeing with the Wisconsin Supreme Court's decision to deny unemployment tax exemptions to a faith-based group because they provided help to people of other faiths. Justice Sonia Sotomayor wrote that the eligibility for exemption should be based on "secular criteria" and not "theological practices". Justices Clarence Thomas and Ketanji Brown Jackson concurred, with the latter stating that the Wisconsin Supreme Court's decision "treats church-affiliated charities that proselytize and serve co-religionists exclusively differently from those that do not".
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Religious tax exemption in the First Amendment
The First Amendment of the US Constitution states that "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof". Despite this, the federal government has exempted churches and other religious organisations from federal taxation. This exemption has existed in the modern federal tax code since the ratification of the Sixteenth Amendment in 1913.
The First Amendment prohibits the US government from favouring religious institutions. However, the Supreme Court has found a rationale for the tax exemption. In 1970, the Supreme Court, led by Chief Justice Warren E. Burger, unanimously sustained a state exemption from real or personal property taxation of property used exclusively for religious, educational, or charitable purposes. The Court argued that the exemption was not to single out churches for special favour, but rather to encourage the beneficial and stabilising influence of non-profit organisations in community life.
Justice Burger also noted that terminating exemptions would deeply involve the government in the internal affairs of religious bodies, as evaluation of religious properties for tax purposes would be required. The Court created a new test, the entanglement test, to judge the program. The Walz Court found that the exemptions administered by the New York City Tax Commission caused no “excessive entanglement,” only a “minimal and remote involvement” between church and state.
The federal legislature from its earliest days has exempted religious entities from the national tax base. Today, all 50 states and the District of Columbia provide various types of property tax exemptions for religious organisations. These exemptions are generally shared with charities. However, this tax exemption is not absolute. For example, the Tax Cuts and Jobs Act (TCJA) imposed a 21% tax on "fringe benefits" that applied to churches.
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Religious tax exemption and government
The concept of religious tax exemption in the United States is deeply rooted in its history, with exemptions for religious entities dating back to the birth of the nation. While the First Amendment prohibits the government from favouring religious institutions, the Supreme Court has justified tax exemptions for religious organizations based on their secular benefits to society. This exemption was formalized in 1970, when the Court unanimously upheld state exemptions from property taxation for religious, educational, and charitable organizations that were non-profit.
The history of religious tax exemption in the US can be traced back to the early settlers, who formed charitable and voluntary associations, including churches. These organizations played a crucial role in serving the public and their members. Despite the absence of a formal government framework, these early charitable groups laid the foundation for the modern tax-exempt sector.
Over time, the federal legislature consistently exempted religious entities from the national tax base. In 1909, the Revenue Act granted tax exemption to corporations and associations organized for religious, charitable, or educational purposes, ensuring that no private individual benefited financially. This act also provided tax deductions for individuals who donated to charitable organizations.
The Revenue Act of 1917 further solidified the tax-exempt status of religious organizations by allowing income tax deductions for contributions made to tax-exempt entities. This legislation aimed to encourage charitable giving during a period of rising income tax rates to fund World War I. Since then, the basic structure of tax exemption for charities has remained relatively unchanged, with only minor modifications to rules governing private foundations.
While the tax exemption for religious institutions has been upheld, it is not absolute. For instance, in 2017, the Tax Cuts and Jobs Act (TCJA) imposed a 21% tax on "fringe benefits" for religious nonprofits, which was later corrected with a retroactive exemption in 2019. Additionally, courts have considered cases where religious organizations engaged in commercial activities, such as using property as a commercial parking lot, and ruled that these activities should be subject to taxation.
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Religious tax exemption and charitable organisations
The history of religious tax exemptions in the United States goes back to the birth of the country and its government. The federal legislature, from its earliest days, has exempted religious entities from the national tax base. However, the specific laws and rulings surrounding these exemptions have evolved over time.
In 1894, religious institutions were unofficially exempt from taxation due to social customs. Ulysses S. Grant considered taxing them but faced harsh criticism.
In 1909, the Revenue Act granted tax exemption to "any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual." This law ensured that private inurement was not a part of any tax-exempt organization.
In 1913, with the ratification of the Sixteenth Amendment, the federal government officially exempted churches and other religious organizations from federal taxation in the modern federal tax code.
The issue of religious tax exemptions came to a head in 1970 with the seminal case of Walz v. Tax Commission of the City of New York. Frederick Walz sued, arguing that his property taxes were artificially high because churches were not required to pay property tax. The Supreme Court, in a nearly unanimous decision, upheld the state exemption from property taxation for property used exclusively for religious, educational, or charitable purposes by non-profit organizations. Chief Justice Burger clarified that the purpose of the exemption was not to favour churches specifically but to encourage a broad category of associations dedicated to social betterment.
Since then, the basic structure of tax exemption for charities in the United States has remained relatively stable, with only minor modifications. The courts continue to navigate the complex relationship between religious tax exemptions and the First Amendment, striving to encourage the beneficial secular effects of religious organizations while avoiding excessive government entanglement and the establishment of religion.
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Frequently asked questions
The federal government has exempted churches and other religious organizations from federal taxation since the ratification of the Sixteenth Amendment to the U.S. Constitution in 1913.
The Revenue Act of 1909 granted tax exemption to "any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual."
The only comment by a Supreme Court Justice prior to 1970 was by Justice Brennan, who deemed tax exemptions constitutional as the benefit was incidental to the religious character of the institutions.
The seminal case regarding religious tax exemption was Walz v. Tax Commission of the City of New York in 1970.
