While most commentators are still focused upon marriage and federal versus state power, admittedly the actual questions before the United States Supreme Court in Obergefell v. Hodges follow on consequences that were once dismissed as alarmist now seem prescient.
In the oral arguments for Obergefell v. Hodges last week, counsel told Justice Alito that if the court found a constitutional right to same-sex marriage, then religious institutions’ tax-exempt status is “certainly going to be an issue.” I concur with this reaction from Michael Greve:
[I]f the tax exemption jazz becomes ‘an issue,’ it’s decided the minute gay marriage becomes the constitutional baseline. Because everyone knows that. Because the LBGT folks already have those complaints and briefs in their drawers, to be filed (almost ‘certainly’) on July 1. And because DoJ and the IRS and OCR, in their last remaining eighteen months in office, are in a hurry to roll over to their constituencies and to hammer the hold-outs, in meticulous observance of the law. A hallmark of this administration. Or maybe they’ll hand out waivers. ‘I don’t deny that’ says ‘dare me. It’s not going to hurt me in this case, and I’ll plant a flag for the next cases.’
He is correct. The tax-exemption battle cases are lying in wait and have been for quite some time. We need to prepare the defense.
It Will Come Down to the First Amendment
The Religion Clauses of the First Amendment have left attacking the tax-exempt status of religious institutions as the only viable way for government to control religion in the United States. Therefore, opponents of religion took time to create an environment in which Americans believe churches can be taxed. For decades now, Americans have assumed that churches’ exemption from taxation is a matter of legislative grace bestowed by section 501(c)(3) of the U.S. tax code.
But, as American schoolchildren learn—or at least they did back when American public schools weren’t in the thrall of testing and assorted education fads—the power to tax is the power to destroy. Americans are rightfully wary of taxing power. It can be a singularly powerful tool of oppression, especially against institutions, which cannot be incarcerated, unlike individuals.
The actual quote, from one of our earliest and most consequential Supreme Court opinions, McCullogh v. Maryland (1816), states, “The power to tax implies the power to destroy.” That mere implication of destruction defeated the government’s right to tax a federal bank in its borders.
Now, 199 years later, a different superior right—citizens’ First Amendment right to free exercise of religion—faces threat of taxation and the implication of destruction.
Religious Organizations Are Pre-emptively Exempt
The argument we must make is rather simple. Take the Religion Clauses of the First Amendment: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof,” and then take this passage from McCullough v. Maryland: “All subjects over which the sovereign power of a State extends are objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident.”
That government may make no law establishing religion or prohibiting the free exercise thereof is a clear statement that the power of government does not extend over the subject of religion. Therefore, religious institutions are exempt from taxation, not by tax code, but by self-evident, sound principles. That’s the simple summary. In the details, the argument gets more complicated. I will introduce a few of the major issues and provide a basic explainer about how we got here.
Free Exercise Versus Establishment
The courts have seen a tension between the Establishment Clause (the command not to establish religion) and the Free Exercise Clause (the command not to inhibit religion). Courts have aimed for “neutrality” on government laws intersecting with religion, but have never settled on a single standard of neutrality. The separate tests for Establishment Clause and Free Exercise Clause violations often clash.
Anti-exemption advocates prefer the Establishment Clause analysis, and will want the cases-in-waiting to be Establishment Clause cases so they may argue that a tax exemption aids religion and, therefore, excessively entangles religion and government. To make that argument, they will seek to overturn Walz v. Tax Commission of the City of New York (1970), a case about New York tax exemptions for property used solely for religious or charitable purposes.
Walz mentioned both the Establishment Clause and the Free Exercise Clause, but the majority opinion and the concurring and dissenting options turned on the Establishment Clause—that is, whether a tax exemption is an “excessive entanglement” of government and religion. The majority held that it was not, and therefore found it “unnecessary to reach the questions of the Free Exercise Clause.” (See footnote 12.)
Later came Regan v. Taxation With Representation of Washington (1983), which held that tax exemptions are subsidies, essentially privileges granted to exempted entities. While the Regan line of cases involve the other entities listed in 501(c)(3), such as public-interest groups and secular charities, anti-religious exemption advocates have long hoped to overturn Walz with the argument that granting tax exemptions constitutes an excessive entanglement of government with religion and therefore violates the Establishment Clause.
This Is about Free Exercise, Not Establishment
That strategy has two major weaknesses. One, there are many arguments to make against the notion of tax exemption as a subsidy—and regardless of the First Amendment issues, overturning any holding that implies government ownership of our wealth or income is a laudable goal. Two, the First Amendment not only prohibited the establishment of religion but also prohibits government from interfering with the free exercise thereof.
In the history of government suppression of religion, the big players are incarnation, torture, or death; direct legal prohibition (which often leads to incarceration, torture, or death); and taxation, with taxation being the method authorities use when they want to pretend neutrality. Taxation is not an establishment question. It is a free-exercise question.
Free Exercise Clause jurisprudence is not as common because the idea that government may not burden exercise of religion didn’t get challenged often. There is a similar pattern in Second Amendment jurisprudence, and even the bulk of the Religion Clauses cases have come since the 1940s. These issues were just too obvious to litigate for our first 150 years. Sometimes it is the hidden law which we need to champion, because now Establishment Clause jurisprudence has a kind of legal gravity. Those who seek to control or suppress religion prefer its rationales, and its frequency provides more case law for the briefing attorneys to write into and the judicial clerks to analyze.
The free-exercise cases typically focus on individual rights and laws which burden particular religions. But the Supreme Court has not addressed the destructive burdens taxation could place on religious houses on the whole. Taxes of general applicability—income taxes, for instance—are not a destructive threat to religious individuals because, back to the analysis in McCullough, the individual has checks on government power in our federal and state constitutional structures. But like the federal bank in McCullough, religious institutions are vulnerable to ruinous taxation. An aggressive and broad tax regime could easily crush many houses of worship, effectively inhibiting individuals’ right to exercise their religion.
Schools, Charities Beware
This is the basic reasoning of Murdock v. Pennsylvania, a 1943 case about imposing a tax on door-to-door salespeople, including Jehovah’s Witnesses:
We do not mean to say that religious groups and the press are free from all financial burdens of government. See Grosjean v. American Press Co., 297 U. S. 233, 250. We have here something quite different, for example, from a tax on the income of one who engages in religious activities or a tax on property used or employed in connection with those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax from him for the privilege of delivering a sermon.
There is a distinguishable fact pattern in a leading case on the issue which has been cited often in popular commentary. In Bob Jones University v. United States, the Supreme Court upheld the Internal Revenue Service’s revocation of the university’s tax-exempt status for its refusal to recognize interracial marriages. But Bob Jones University was merely dedicated to what it deemed Christian principles. It was not owned or formally affiliated with a religious institution.
Note here, that should the argument I am making about the power to tax religious institutions eventually prevail, there will be much litigation over what exactly is a religious institution. Schools, charities, and other programs created, owned, or housed by churches, synagogues, mosques, or official religious bodies like the Catholic Church, might remain within the tax exemption sphere, but entities “dedicated to,” “modeled after,” or otherwise “affiliated” with religious institutions will quickly face litigation and could easily lose their tax-exempt status. Furthermore, anti-exemption advocates will sue the religious institutions themselves, arguing that any non-religious activities, such as renting Sunday School rooms to a public preschool or hosting independent recovery groups, defeat the failure of governments’ tax powers.
To preserve free exercise of religion, lawyers need to establish that questions of taxation—not exemption, but the power to tax—of religious institutions necessarily fall under the Free Exercise Clause, because if the government has the power to destroy religious institutions, then the individuals’ right to free exercise of religion is empty.
History Favors Tax Exemption
The concept of tax exemption for houses of worship is ancient, as in Mesopotamia, Babylon, and Old Testament ancient. Many scholars attribute some of the ancient tax exemptions to favor by the ruler or monarch, which to an American mind should argue all the more for an immutable exemption. We are a nation founded upon a tax revolt, and playing favor with tax exemptions and confiscations is the stuff of horrible histories. (See, generally, English Tudor monarchs).
At the beginning of the United States, only the federal government was prohibited from establishing a religion. The state governments could and did establish churches, which they did not tax. On the contrary, they often collected taxes for the church. (After the Civil War, the ratification and subsequent case law of the Fourteenth Amendment incorporated the federal proscription against an established religion to the individual states.)
Throughout our history, religious tax exemptions appeared all over federal and state statues. When written, 501(c)(3) was a statement of practice, a codification of the self-evident.
But, over time, we forgot that history. We think of religions as we think of charities, exempt only if they comply with the 501(c)(3) regime. Among religious institutions, churches, in particular, have unwittingly encouraged this view by “rendering unto Caesar,” that essential Christian teaching to respect secular authority, even when we don’t agree with it. Even those engaging in civil disobedience against the exemption requirements have assumed governments’ right to tax religion.
The exemption still holds because, until now, the IRS has not had enough confidence in success to aggressively enforce its tax-exemption regulations against churches. Even acts of civil disobedience did not provoke IRS investigations. The Freedom From Religion Foundation sued the IRS over this issue in 2012. That case settled last summer, apparently due to IRS assurances to the FFRF that they had new plans for stricter enforcement. At this time, the IRS is under an investigation moratorium while Congress investigates the IRS’s recent political oppression activities.*
When that moratorium ends, will the IRS use new rights granted by the United States Supreme Court as the tool for their stricter enforcement of 501(c)(3) exemptions? According to government counsel, that will “certainly be an issue.”
The taxman cometh, and not to raid our individual pocketbooks, but to radically impose burdens on the free exercise of religion. The power to tax does involve the power to destroy, and of late the IRS has given We the People little confidence that it would not use its power destructively. While religious institutions are subject to the taxing power of government, they are vulnerable.
* The TaxProfBlog has been recapping each day of the IRS scandal, which at the time I drafted this article was at day 721. The investigation has taken so long, of course, because so much of the evidence is missing. Whether this is due to intentional destruction of incriminating documents or catastrophic computer and server failure, neither implies confidence in the IRS.