Thursday, July 16, 2015

Separation of Church and State - Tax Status

I ended my previous post with these words...
A couple of conclusions...
1. religious organizations have special status in the constitution whether we like that or not.
2. that special status leads to a unique relationship between government and religious organizations.
3. while we certainly can change the constitution, there would be consequences for such a move.  To remove the establishment or impediment clause might indeed open the door to an established religion and those who argue for the United States as a "Christian" nation, might just get their way.  At the very least, those who are part of minority traditions (possibly including atheists), could find themselves suffering under official law.
Keep those observations in mind.

In 1819, Chief Justice John Marshall of the supreme court noted, "The power to tax involves the power to destroy."  While the context of the statement was not a church state decision, the import is the same.  To grant any government agency the power to tax religious organizations is in direct contradiction to the 1st Amendment free exercise clause as it gives the government control over religion.  Again, we cannot escape the fact that the constitution gives a unique status to religious organizations that places them outside of the reach of government.  The implications are both important and far-reaching with the most obvious being that churches do not pay taxes.   Depending upon the location, churches often do pay other fees and assessments levied on property.

Some folk think clergy do not pay taxes.  Not true.  Clergy pay income tax and self-employment tax.  Due to some weird legal thing, clergy are seen as employees for income tax purposes and self-employed for payroll tax purposes.   It is true that if a clergy person lives in church owned housing, he or she does not pay income tax on the rental value of that housing.   They do pay self-employment tax though, on the fair rental value.   As I understand it,  other employees who live on property owned by the employer for the benefit of the employer such as building superintendents, college presidents, college resident assistants, military personnel, etc. receive that housing tax free as long as they meet three tests -

  1. The lodging is furnished on the business premises of the employer;
  2. The lodging is furnished for the convenience of the employer, and
  3. The employee is required to accept such lodging as a condition of employment

From what I can see, folk other than clergy do not pay self-employment tax on their housing nor is a payroll tax deducted.  So... at that point (if I'm correct) these other categories of employees actually get a significantly higher tax benefit than do clergy.  Self employment tax is HIGH.

So, it is relatively easy to justify the value of living in a parsonage as exempt from income taxes for a clergyperson as it can easily be seen to meet those three tests.  There is an additional piece, though, that comes into play for clergy sometimes known as a "housing allowance."  I don't know whether a similar benefit exists for anyone else.  I suspect that if it does, the rules are a lot more stringent than for clergy.  Clergy who own their own homes or live in rental properties can receive part of their salary designated as a "housing allowance" equal to the actual cost of housing or the fair rental value, whichever is lower. The housing allowance is not subject to income tax but is subject to self-employment tax just like the fair rental value of a parsonage. The reasoning behind this goes back to the free exercise clause.  This idea is there to equalize the ability of religious organizations which do not own housing for their leaders to exist relative to those that do own that property.  This benefit is challenged in court regularly and so far has been upheld. 

There are other implications of that unique status held by religious organizations that are also important that I may pick up in other posts at some time... I believe that the Johnson Amendment of 1954 (that is when non-profits were prohibited from making political endorsements) cannot apply to churches as that impedes free exercise.  I believe that laws such as zoning etc. also do not apply to churches.   Historically the court has said that the state must show a "compelling interest" to reach over the wall between church and state.  I would argue that the constitution requires that to be a very high bar.  Finally, I like to remind people that churches do not receive tax exempt status because of the benefit they provide to society.  Churches find their unique relationship to the state enshrined in the First Amendment.  They are not like other non-profits.

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