Religious entities pay more taxes than many people believe. Moreover, churches and other religious organizations are treated quite diversely by different taxes and by different states. Sometimes churches and other religious entities are taxed in the same fashion as secular organizations and persons are. Yet other taxes narrowly exempt churches while taxing secular philanthropic organizations.
The states’ sales taxes, for example, vary in their respective approaches to religious institutions. In some states, churches and other religious organizations both pay sales tax on their retail purchases and collect tax on their retail sales. In other states, churches and other sectarian entities pay sales tax as retail buyers but do not collect tax as retail sellers. And yet with other states, the pattern is reversed, with churches and religious organizations collecting taxes on their retail sales while they are exempted from the taxation of their retail purchases. In other states, churches are wholly immune from sales tax obligations as either buyers or sellers.
To take a second example, within the broad consensus exempting churches from property taxation, states disagree about the property tax status of parsonages in which clergy live. Some states exempt parsonages from property taxation; others do not. In some states, housing occupied by supervising clergy qualifies as tax-exempt parsonages. In other states, it does not.
Central to understanding the tax status of religious organizations is the concern which has come to be called “entanglement”:either taxing or exempting churches and other sectarian entities entangles church and state. In the tax context, there are no disentangling alternatives. Some taxes entail more church-state entanglement than do other taxes. Different tax provisions entail different types and different quantities of entanglement risk.
Enforcing ad valorem property taxation, for example, can enmesh taxpayers and tax collectors in difficult disputes about the value of real property. Such taxation can also lead to enforcement entanglement when property owners lack the liquidity to pay tax. In cases where a property owner has no cash to discharge his property tax obligations, the tax collector must take action – typically foreclosure – to collect property taxes owed but unpaid. The taxes generating the greatest enforcement entanglement are those, like ad valorem real property taxation, where the amount of the taxpayer’s liability may be difficult to determine and where the taxpayer may lack the cash to pay the tax.
In contrast, sales taxation is a form of taxation less expectant with possibilities for church-state enforcement entanglement. Most retail sales involve no valuation controversy as the purchaser usually pays an easily-ascertainable cash price. Most taxable sales present no liquidity issues since the purchaser typically pays cash including the sales tax owed on his purchase. It is thus unsurprising that in many states churches and other religious organizations pay or collect the less entangling sales tax.
Similarly, real estate conveyance taxes apply to the sales and purchases of sectarian entities since these are typically easily-taxed cash transactions.
Taxing the church or exempting the church involves imperfect trade-offs among competing and legitimate values. On balance, our federal system of decentralized legislation makes these trade-offs reasonably, though not perfectly. For example, the sales tax obligations of churches and religious entities could in many states be broadened without risk of significant additional church-state entanglement. Moreover, cash parsonage allowances should be taxed. Even if parsonage allowances are included in clerical incomes, modestly compensated clergy, like other low-income individuals, would pay little or no federal income tax anyway due to the standard deduction, personal allowances and the earned income credit.
On the other hand, the so-called “Johnson Amendment,” which precludes churches and other tax-exempt institutions from political campaigning, is overly-broad and, as currently interpreted, unacceptably burdens the internal communications within churches, synagogues, mosques, and other religious congregations.
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