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Compelling Reasons to Retain Tax Exemptions for Religious Institutions (Part 1)

The tax-exempt status of religious institutions remains a topic of discussion in American public life.[1] From time to time, public debate regarding this issue flares up, and this appears to be one of those times. Within the last year, several prominent news outlets have published articles and opinion pieces debating the wisdom of tax exemptions. (See, e.g, the September 2015 debate sponsored by The Washington Post, and Mark Oppenheimer’s Now’s the Time to End Tax Exemptions for Religious Institutions)

The current flare up was fanned into flame by the oral argument heard in Obergefell v. Hodges. (See Michael J. DeBoer, Justice Scalia and Clergy Solemnization of Same-Sex Marriages) During the argument, Supreme Court Justice Samuel Anthony Alito, Jr. asked the Solicitor General of the United States, Donald B. Verrilli, Jr., whether the tax-exempt status of religious colleges and universities that oppose same-sex marriage could be in doubt if the Court were to recognize same-sex marriage as a fundamental right. More specifically, Justice Alito observed that the Court in Bob Jones University v. United States[2] had held that “a college was not entitled to tax-exempt status if it opposed interracial marriage or interracial dating,” and he asked if “the same would apply” to religious colleges and universities if they oppose same-sex marriage.[3] The Solicitor General responded: “I don’t think I can answer that question without knowing more specifics, but it’s certainly going to be an issue. . . . I don’t deny that, Justice Alito. It is . . . going to be an issue.”[4]

Two months later, the Supreme Court in a 5-4 decision recognized a new constitutional right—the right of same-sex couples to marry.[5] The Court held that the Fourteenth Amendment to the United States Constitution requires states to license marriages between two people of the same sex and recognize such marriages when they are lawfully licensed and performed out-of-state.

As a result of the Court’s Obergefell ruling, states and the federal government are changing their laws, and some of these changes will directly affect people of faith and religious institutions. Nevertheless, the opinion of the Court in Obergefell, which was written by Justice Anthony M. Kennedy, offered virtually nothing to address the tax-exemption concern Justice Alito raised. The following paragraph is all that the Kennedy opinion offered on the issue and the other religious liberty concerns:

Finally, it must be emphasized that religions, and those who adhere to religious doctrines, may continue to advocate with utmost, sincere conviction that, by divine precepts, same-sex marriage should not be condoned. The First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths, and to their own deep aspirations to continue the family structure they have long revered. The same is true of those who oppose same-sex marriage for other reasons. In turn, those who believe allowing same-sex marriage is proper or indeed essential, whether as a matter of religious conviction or secular belief, may engage those who disagree with their view in an open and searching debate. . . .[6]

One month after the Obergefell ruling, Internal Revenue Service (IRS) Commissioner John Koskinen indicated to a Senate subcommittee that, in the remaining two and a half years of his term, the IRS would not take action to remove the tax-exempt status of religious colleges and universities based on their beliefs on same-sex marriage.[7]

For people of faith in America, the tax-exempt status of religious organizations is not “going to be an issue,” as Solicitor General Verrilli surmised. For them, the tax-exemption issue has been a longstanding concern, and it will remain so. Their concern regarding tax exemptions, however, extends well beyond the financial implications. For them, tax exemption is about organizational autonomy and freedom from governmental control. It is about their fidelity to fundamental beliefs, core values, and faith-inspired missions. It is about government seizing the power to define what qualifies as right belief and the threat of government rewarding compliance and punishing noncompliance with government-defined orthodoxy.

Those religious institutions that have publicly expressed a commitment to the biblical definition of marriage and the traditional Christian understanding of sexuality and marriage feel the pressure of the tax-exemption debate acutely. But again, for these organizations, the concern extends beyond the potential impact on their properties and their bottom lines. For them, the concern is existential in a deeper sense—losing tax-exempt status would mean losing their freedom from governmental control over beliefs and values and governmental intrusion into questions of organizational identity and mission. As to this concern, Justice Kennedy’s remark and Commissioner Koskinen’s representation have done little to allay fears.

As Christians engage publicly on the tax-exemption issue, several fundamental points regarding taxation and several well-established justifications for tax exemptions should be kept in mind.[8] The following points and justifications for tax exemptions are not ranked in order of strength. Rather, they are organized so as to take up historical, social, and policy grounds first (in Part 1 of this essay) and then constitutional grounds and other points second (in Part 2).

Religious and Other Nonprofit Organizations Have Been an Enduring Feature of American Society, and Americans Form Them to Pursue a Variety of Shared Purposes.

Religious organizations, charitable institutions, and other nonprofit associations have been constructive features of American society since the colonial period. In 1835, Alexis de Tocqueville, an early observer of America, provided the following reflection on the place of nonprofit organizations and voluntary associations in American society:

Americans . . . constantly form associations. They have not only commercial and manufacturing companies . . . , but associations of a thousand other kinds, religious, moral, serious, futile, general or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; in this manner they found hospitals, prisons, and schools. If it is proposed to inculcate some truth or to foster some feeling by the encouragement of a great example, they form a society. Wherever at the head of some new undertaking you see the government in France, or a man of rank in England, in the United States you will be sure to find an association.[9]

Americans continue to associate together and form organizations to accomplish cultural, economic, educational, political, religious, scientific, social, and other purposes.[10] Exempting these organizations from taxation has helped to ensure that this feature of American society (the voluntary, nonprofit sector) remains vigorous and endures for future generations.

Religious and Other Nonprofit Organizations Contribute Many Benefits to Society.

Religious and other nonprofit organizations confer a wide range of public benefits and often meet needs that government might otherwise seek to meet.[11] These benefits include cultural, educational, philanthropic, and other contributions.[12] In the tax-exemption debate, attention should be given to the public benefits these organizations contribute because tax exemptions originated in political and social philosophy and charitable trust doctrine, not economic theory (where much focus is placed today).[13]

In addition to conferring these public benefits, religious and other nonprofit organizations promote freedom, republican ideals, and civic virtue. Nearly two centuries ago, Tocqueville wrote about the constructive role religion and religious organizations in America play in maintaining a free society:

Religion in America takes no direct part in the government of society, but it must nevertheless be regarded as the foremost of the political institutions of that country; for if it does not impart a taste for freedom, it facilities the use of free institutions. . . . [Americans] hold [religion] to be indispensable to the maintenance of republican institutions. This opinion is not peculiar to a class of citizens or to a party; but it belongs to the whole nation, and to every rank of society.[14]

So understood, governments give tax exemptions as a quid pro quo—they exchange tax exemptions for the benefits these institutions confer. As one federal court has explained, “the public is willing to relieve an organization from the burden of taxation in exchange for the public benefit it provides.”[15]

Several United States Supreme Court decisions reflect this understanding. In 1924, the Court acknowledged that the income-tax exemption is designed to assist organizations based upon the public benefits they confer.[16] The Court stated that “the exemption is made in recognition of the benefit which the public derives from corporate activities of [corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes], and is intended to aid them when not conducted for private gain.”[17] In 1970, the Court observed that tax exemptions draw upon “an affirmative policy that considers [religious and nonprofit organizations] as beneficial and stabilizing influences in community life” and that states had found the exempt classification “useful, desirable, and in the public interest.”[18] In 1983, the Court similarly recognized that “[c]haritable exemptions are justified on the basis that the exempt entity confers a public benefit—a benefit which the society may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues.”[19] In 1990, the Court added that “exemption from federal income tax is intended to encourage the provision of services that are deemed socially beneficial.”[20]

Consequently, when governments exempt from taxes nonprofit organizations that confer public benefits, they advance social goals by easing the burden on organizations that are contributing to the good of society.[21] Conversely, removing tax exemptions and imposing taxes on currently exempt organizations would have the deleterious effects of hampering the ability of these organizations to provide benefits and depriving beneficiaries of services.

Religious and Other Nonprofit Organizations Ensure Institutional Pluralism in Society.

Nonprofit organizations, including tax-exempt organizations,[22] collectively constitute the voluntary nonprofit sector of American society, which is distinct from the government sector and the for-profit sector.[23] As one commentator has explained, the nonprofit sector provides balance in civil society, and it “is seen as being essential to the maintenance of freedom for individuals and a bulwark against the excesses” of the government and for-profit sectors.[24] Religious and other nonprofit organizations thus promote diversity among institutions in society, and tax exemptions promote institutional pluralism.[25]

In 1983, Supreme Court Justice Lewis F. Powell, Jr. embraced this institutional pluralism rationale and added a point about viewpoint diversity:

[Tax exemptions play an important role] in encouraging diverse, indeed often sharply conflicting, activities and viewpoints. As Justice [William J. Brennan, Jr.] has observed, private, nonprofit groups receive tax exemptions because “each group contributes to the diversity of association, viewpoint and enterprise essential to a vigorous, pluralistic society.” Far from representing an effort to reinforce any perceived “common community conscience,” the provision of tax exemption to nonprofit groups is one indispensable means of limiting the influence of governmental orthodoxy on important areas of community life.[26]

Institutional pluralism thus serves to limit government influence over beliefs, values, and activities in society. Additionally, Christian organizations, by recognizing divine authority and citizenship in another kingdom, offer a vision of sovereignty that challenges the authority claims of human government.

Tax Exemptions Immunize Religious and Other Nonprofit Organizations from Tax Liabilities, Thereby Safeguarding Organizational Viability and Ensuring a Robust Voluntary/Nonprofit Sector.

State and federal tax laws impose income, property, sales and use, and employment-related taxes on individuals and organizations, exposing them to various liabilities, including tax payments, fees, interest, and civil and criminal penalties. Consequently, tax exemptions immunize qualified organizations and purposes from tax liabilities.

By granting exemptions and immunizing organizations from tax liabilities, government helps to ensure that these organizations have the financial ability to operate, confer benefits, meet social needs, and improve society and that the nonprofit sector and society flourish.[27] In 1970, the Supreme Court recognized the constraining effect that tax liabilities have on nonprofit organizations. It observed that state property tax exemption laws are predicated on a public policy determination that those institutions that “exist in a harmonious relationship to the community at large” and “foster its moral or mental improvement” “should not be inhibited in their activities by property taxation or the hazard of loss of those properties for nonpayment of taxes.”[28]

The money that nonprofit organizations do not have to pay in taxes can be reinvested in the organizations and used to serve beneficiaries. Additionally, any surpluses (net earnings) may be used to operate and improve facilities, retire debt, and expand or improve services.

The historical, social, and policy reasons that have been discussed in Part 1 of this essay provide sound justifications for retaining tax exemptions for religious organizations. But constitutional reasons also exist, and these will be discussed in Part 2, along with several additional points regarding taxes and tax exemptions.

Note: This essay is adapted from his article “Religious Hospitals and the Federal Community Benefit Standard—Counting Religious Purpose as a Tax-Exemption Factor for Hospitals,” which was published in the Seton Hall Law Review in 2012.

[1] In this essay, the author will use the terms “religious institutions” and “religious organizations” interchangeably. These two terms are broad and encompass an array of religious institutions, including churches, synagogues, and mosques; religious educational organizations; religious social welfare organizations; and religious institutional health care providers. The term “church” is narrower than “religious institution” and “religious organization,” and the law applicable to churches provides some different rules than those that apply to religious organizations. This essay does not discuss the definitions or tests for determining what constitutes religion, whether an activity is religious, whether an organization is religious, or whether an entity is a church. Rather, this essay assumes that all organizations discussed herein are bona fide religious organizations.

[2] Bob Jones University v. United States, 461 U.S. 574 (1983).

[3] Transcript at page 38. For the official transcript of oral argument, see The transcript citations herein reference pages of the Question 1 transcript.

[4] Transcript at 38.

[5] Obergefell v. Hodges, 135 S.Ct. 2584 (2015).

[6] Id. at 2607.

[7] Sarah Pulliam Bailey, IRS Commissioner Promises Not to Revoke Tax-exempt Status of Colleges That Oppose Gay Marriage (Aug. 3, 2015),

[8] For thoughtful discussions of the various rationales for tax exemptions, see Nicholas P. Cafardi & Jaclyn Fabean Cherry, Understanding Nonprofit and Tax Exempt Organizations 51-60 (2006); Bruce R. Hopkins, The Law of Tax-Exempt Organizations 9-21 (11th ed. 2016).

[9] 2 Alexis de Tocqueville, Democracy in America 106 (Phillips Bradley ed., Henry Reeve trans., Alfred A. Knopf 1945) (1835).

[10] From the colonial period onward, English legal sources have shaped the perspective of Americans regarding religious, charitable, and other exempt organizations and charitable purposes. One prominent English legal source, the Statute of Charitable Uses of 1601, recognized an array of charitable purposes that were deemed to benefit society in general and the poor in particular, including organizations to relieve the poor, maintain the sick, operate schools, repair bridges, ports, churches, and highways, educate orphans, maintain houses of correction, aid young people in trades and crafts, and redeem prisoners. See 43 Elizabeth I, c. 4 (1601) (Eng.).

[11] See Barrett Duke, Tax Exemption, Churches, and the Communities They Serve (Apr. 13, 2016),; Marshall Griffin, Southern Baptists Serving Their Neighbors: Service Initiatives of Southern Baptist Churches,; Andrew Lewis, Some Positive Benefits Churches Bring to Communities (Mar. 13, 2008),; David O’Reilly, A Study Asks: What’s a Church’s Economic Worth? (Feb. 1, 2011), For information regarding charitable giving in the United States in 2014 and the categories of religious and charitable organizations receiving these gifts, see Giving USA, Americans Donated an Estimated $358.38 Billion to Charity in 2014; Highest Total in Report’s 60-year History (June 29, 2015),

[12] One federal court has explained that one reason for such exemptions is that the organization “performs a public service and benefits the public or relieves it of a burden which otherwise belongs to it.” St. Louis Union Trust Co. v. United States, 374 F.2d 427, 432 (8th Cir. 1967). Additionally, a report of the House Committee on Ways and Means observed:

The exemption from taxation of money and property devoted to charitable and other purposes is based upon the theory that the government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.

H.R. Rep. No. 75-1860, at 19 (1939).

[13] Bob Jones Univ., 461 U.S. at 587-92; McGlotten v. Connally, 338 F. Supp. 448, 456 (D.D.C. 1972); Robert E. Atkinson, Jr., Theories of the Special Tax Treatment of Nonprofit Organizations, in Federal and State Taxation of Exempt Organizations ch. 15 (Barbara L. Kirschten & Frances R. Hill eds., 1994); Hopkins, supra, at 9 (stating that the law of tax exemptions for nonprofit organizations “has little to do with any underlying tax policy. Rather, this aspect of the tax law is grounded in a body of thought rather distant from tax policy: political philosophy as to the proper construct of a democratic society”).

[14] Tocqueville, supra, at 305-06.

[15] IHC Health Plans, Inc. v. Comm’r of Internal Revenue, 325 F.3d 1188, 1195 (10th Cir. 2003).

[16] Trinidad v. Sagrada Orden de Predicadores de la Provincia del Santisimo Rosario de Filipinas, 263 U.S. 578, 581 (1924).

[17] Id.

[18] Walz v. Tax Comm’n of City of New York, 397 U.S. 664, 673 (1970).

[19] Bob Jones Univ., 461 U.S. at 591.

[20] Portland Golf Club v. Comm’r, 497 U.S. 154, 161 (1990).

[21] Hopkins, supra, at 11-17.

[22] The terms “tax-exempt organization” and “nonprofit organization” are not synonymous. Tax-exempt organizations are a subset of nonprofit organizations. Nonprofit status is a matter of state organizational and trust law. Tax-exempt status is a matter of state and federal tax law. To be exempt from tax, an organization must be a nonprofit organization and meet the legal requirements for qualifying for exemption from a state or federal tax, such as state or federal income, sales/use tax, or property tax. Consequently, a tax-exempt organization must be nonprofit, but a nonprofit organization is not necessarily tax exempt.

[23] Hopkins, supra, at 5-6.

[24] Id. at 5. See also Hosanna-Tabor Evangelical Lutheran Church & Sch. v. Equal Emp’t Opportunity Comm’n, 132 S.Ct. 694, 712 (2012) (“Throughout our Nation’s history, religious bodies have been the preeminent example of private associations that have ‘act[ed] as critical buffers between the individual and the power of the State.’”) (quoting Roberts v. United States Jaycees, 486 U.S. 609, 619 (1984)). In 1973, the Treasury Secretary testified that tax-exempt organizations “are an important influence for diversity and a bulwark against over-reliance on big government.” Dep’t of the Treasury, GPO Bookstore Stock No. 4800-00210 Proposals for Tax Change (1973).

[25] Hopkins, supra, at 11-12, 15-16.

[26] Bob Jones Univ., 461 U.S. at 609 (Powell, J., concurring) (quoting Walz, 397 U.S. at 689 (Brennan, J., concurring)).

[27] One legal commentator has observed:

[In providing for exemptions and charitable deductions,] Congress is not merely “giving” eligible nonprofit organizations “benefits”; the exemption from income taxation (or charitable deduction) is not a “loophole,” a “preference,” or a “subsidy”—it is not really an “indirect appropriation.” Rather, the various provisions of the federal and state tax exempt system exist as a reflection of the affirmative policy of American government to refrain from inhibiting by taxation the beneficial activities of qualified tax-exempt organizations acting in community and other public interests.

Hopkins, supra, at 16.

[28] Walz, 397 U.S. at 672 (internal quotation marks omitted).

Michael J. DeBoer
Michael J. DeBoer is an Associate Professor of Law at Faulkner University, Thomas Goode Jones School of Law. He holds degrees from Indiana University, Valparaiso University, Southeastern Baptist Theological Seminary, and Liberty University.

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