Under Internal Revenue Code Section 107(2), “ministers of the gospel” can exclude from the federal income tax cash payments from their congregations and other religious employers for such ministers’ housing. The IRS and the courts have held that this income tax exclusion applies to clergy of all religions including rabbis, cantors, and imams. Income tax-free housing payments to clergy are commonly denoted as “parsonage allowances.” Judge Barbara Crabb of the US District Court for the Western District of Wisconsin, adhering to her earlier conclusion, has recently held the federal income tax exclusion for parsonage allowances unconstitutional.
Judge Crabb’s conclusion that Code Section 107(2) violates the Establishment Clause of the First Amendment rests on the premises that all tax exemptions constitute subsidies and that the purpose and effect of tax exemptions limited to religious actors are to subsidize religion. The most important articulation of these premises occurs in the US Supreme Court’s decision in “Texas Monthly v. Bullock.” That decision struck as unconstitutional Texas’ sales tax exemption for religious literature.
The parsonage allowance controversy will proceed from Judge Crabb’s trial court to the US Court of Appeals and, perhaps, the US Supreme Court. In these courts, an alternative vantage will be pressed. In another Supreme Court decision, Walz v. Commissioner, Chief Justice Burger condoned for himself and five of his colleagues “permissible state accommodation” “to avoid excessive entanglement” of government and religious institutions. On these entanglement-avoiding grounds, Walz upheld against the constitutional challenge of New York’s property tax exemption for religious properties. From this perspective (embraced by three justices dissenting in Texas Monthly), the income tax exclusion created for parsonage allowances by Section 107(2) is a constitutionally reasonable accommodation between church and state to avoid entanglement between them.
My conclusion (rejected by Judge Crabb) is that Section 107(2) survives constitutional challenge under Walz and that opinion’s approval of religious tax exemptions to minimize church-state entanglement. The income tax exclusion created by Section 107(2) for clerical housing allowances is a plausible (though not compelled) means of reducing the church-state entanglement inherent in taxing religious institutions and actors.
In our society, there is no more entangling legal relationship than the relationship between the tax collector and the taxpayer.
Americans celebrate the separation of church and state. But under modern American tax systems, there is no plausible way to separate completely the secular and the sectarian. When governments tax churches and other religious institutions (as governments often do), the result is church-state entanglement as churches and other religious entities comply with the tax law, and governments enforce the tax law against these sectarian institutions.
If governments exempt from taxation churches and other religious entities, a different type of church-state entanglement occurs, as it becomes necessary at the borders of exemption to determine who is religious and thus qualifies for the exemption. Either way – taxing or exempting – modern tax systems entangle church and state.
The best we can do is minimize the inevitable entanglement between the modern church and modern government. Some taxes entangle more than others. Sales taxes, for example, typically engender less church-state entanglement than other taxes since most sales are easily valued cash transactions in which the purchaser has the additional cash to pay the tax. It is thus unsurprising that many states subject religious institutions, as buyers, sellers or both, to their less entangling sales taxes.
On the other hand, the property taxation of churches carries greater possibilities for church-state entanglement since church properties may be difficult to value and since churches (like other property taxpayers) may lack cash to pay the tax. It is thus equally unsurprising that every state in the union exempts from property taxation houses of worship – though the states vary among themselves in their respective policies toward the property taxation of church-owned housing and of religious facilities such as a summer camps. Some states tax these kinds of religious facilities. Other states do not.
In the broader context articulated in Walz, the federal government’s decision to exclude from income taxation parsonage allowances is a “permissible state accommodation” “to avoid excessive entanglement” of government and religious institutions.
Permitted does not mean required. As a matter of tax policy, cash parsonage allowances are more closely analogous to the sales taxes which states often impose on churches than to the property taxes from which churches are exempt. Like cash sales, parsonage allowances involve easily valued cash transactions between clergy and their respective congregations and other employers. As a matter of tax policy, it is fairer and more efficient to tax cash income than to exclude it from the tax base.
Thus, the higher courts should, on the authority of Walz and its entanglement-avoidance rationale, overturn Judge Crabb’s decision and confirm the constitutionality of Internal Revenue Code Section 107(2) and the income tax exclusion that provision extends to parsonage allowances. On the other hand, as Congress seeks to reform the federal income tax by broadening the tax’s base to lower the tax’s rates, the income tax’s exclusion of parsonage allowance should be one of the many provisions Congress should repeal.
Featured image credit: Religious escape by Tim Wright. Public domain via Unsplash.