Oh no—somebody on the Internet is wrong while I’m on vacation! But duty calls.
Recently, Ryan Cragun, a sociology professor, along with students Stephanie Yeager and Desmond Vega, argued that the government subsidizes religion by about $71 billion a year. He thinks this is wrong, and that religions should pay their fair share.
I have no problem with his making this argument—tax exemption costs the government significant revenue (though his $71 billion is based on really, really poor assumptions—more on that later), and should be examined carefully and critically.
But Prof. Cragun’s analysis is not the careful and critical examination that the tax treatment of churches deserves. His piece has a number of significant problems. I’m not going to address all of the problems, including the fact that he appears unaware that there is an extensive academic literature that explores the place of a tax exemption for churches,[fn1] but I am going to address a handful of his assertions. In the end, though, what bothers me most about Cragun’s piece is that he’s taken an important topic and made it into a polemic. Those who agree with him now have “facts” to bandy about, while those opposed have a specious argument they can treat as an easily-dismissed straw man, and can ignore engaging in a valuable tax policy discussion.
Before I get into my specific criticisms, though, I want to make a couple points upfront. First, although I find lots of legal and methodological problems with Cragun’s analysis, I wouldn’t consider it a salvo in some sort of war on religion. Arguing that churches should not be exempt from taxation is not an inherently anti-religious question. Especially in a world of fiscal shortfalls and increased need, it’s important to critically evaluate expenditures, including tax expenditures.
My impression is that Cragun saw what looked like an interesting topic, one related to a subject he was interested in, and ran with it. It turns out, though, that there’s a steep learning curve associated with his chosen topic. Frankly, I hope that, if I were to explore the sociology of nontheists, that I could come as close to asking the right questions as he comes.
Second, I’m not attempting to make an affirmative case for tax exemption generally, or for exempting religious organizations in particular. My sole project here is to react to some of Cragun’s assertions. With that said, on to specifics.
1. Tax-Exempt Organizations. Cragun begins by arguing against churches as “charities.” If they’re not charitable organizations, he says, then taxing them is fair game. He proposes that, in order to be charitable, an organization should be required to spend at least 50% of its revenue on “charitable work addressing physical needs.”[fn2]
He doesn’t provide any support—other than a reference to the Red Cross—for that definition, but I’m not actually interested in arguing about what constitutes a charity. Because tax-exempt and charitable are not coterminous.
Did you know that the NCAA is tax-exempt? The NFL? Labor unions? Some fraternal organizations? Universities, including the one at which I teach and the one Cragun teaches at? Some of them probably shouldn’t be exempt from taxes (I’m looking at you, NFL and NCAA!), but I’m almost certain that none would qualify as a charity under Cragun’s definition. Which makes singling out religious tax-exempt organizations disingenuous at best.
2. Donations. Per Giving USA, religions received nearly $101 billion in donations in 2009. Cragun estimates the churches’ exemption from tax cost the federal government $35.3 billion in revenue on this income, and cost state governments an additional $6.18 billion. (That $41.5 billion represents more than half his estimate of the tax cost of churches’ tax exemption.)
Except that it doesn’t cost the government $41.5 billion. Under the Internal Revenue Code,[fn3] gifts do not constitute income to the recipient.[fn4] And, according to the IRS and DC Circuit dicta, donations to churches count as gifts.[fn5]
This lost revenue, then, doesn’t qualify as lost revenue. Under generally applicable tax law, churches would not pay taxes on donations[fn6] even if they weren’t exempt from tax, and even if they weren’t churches.[fn7]
3. The Parsonage Allowance. If you’re lucky, maybe your employer provides you with housing at a below-market price. If you do get employer-provided housing at a below-market price, though, the difference between what you pay and what you would pay without the employer subsidy is considered compensation to you, and you owe taxes on that difference.
Unless you’re a “minister of the gospel.”[fn8] If you are, you can exclude the value of employer-provided housing, whether it is provided I the form of actual housing or in cash as a housing allowance.[fn9]
Cragun takes issue with the parsonage allowance. As, frankly, do I. It’s purely a political animal; not only is there no tax policy reason for it, but it flies in the face of important tax policy considerations, including the fundamental equity consideration of horizontal equity, which holds that similarly-situated taxpayers should pay similar amounts of tax.
Still, notwithstanding my fundamental agreement in this point, I’m deeply skeptical of his quantification of the cost. With 600,000 ministers, Cragun assumes an average marginal tax rate of 25% and an $8,000 annual allowance. He takes his average salary from salary.com, but doesn’t explain how he arrives at his annual allowance, or why he assumes that each of the 600,000 ministers receives a parsonage allowance. I don’t have any idea what the true number is, but I suspect that $1.2 billion is not a good estimate.[fn10]
4. Property Tax. I’m a federal income tax guy, not a state and local guy, so I don’t have much to say about this part of Cragun’s analysis, except that his numbers are unconvincing. Though my stats knowledge is rusty, I’m pretty sure that a non-random selection of 47 church buildings (for six Protestanty religions) in the Tampa area is not a statistically valid sample for estimating an average value for all religious real property nationwide.
Moreover, Cragun doesn’t explain how he determined the property tax rate he used, but determining an appropriate rate is tough. It turns out that propert tax is not a state-level, but a local-level tax, meaning there are probably hundreds, if not thousands, of property tax jurisdictions in the US. You can estimate some sort of weighted average rate to use, of course, but it’s complicated, and it would be nice if Cragun had told us how he arrived at whatever rate he used in his calculation.
5. Deductions. Cragun asserts that the deductibility of donations to churches increases donations. That may be, but it’s not an uncontroversial assertion. It depends on whether donors are determining the amount of their donations pre-tax or not. That is, if I want to donate $10 to a church, and am in the 35% tax bracket (and I itemize—more on that in a minute), the church gets $10, but that $10 only costs me $6.50. In that case, the entire subsidy went to me. On the other hand, if I want my donation to cost me $10 after taxes, I can donate $15.38, and the church gets the benefit of the deduction. It’s not clear to me, in the real world, that most people think in after-tax dollars.[fn11]
Moreover, only about a third of taxpayers (give or take) itemize. Taxpayers who don’t itemize don’t get any tax benefit from their charitable donations (or deductions for mortgage interest, or other itemized deductions). And donors to churches are more likely than other donors to be non-itemizers.[fn12]
Conclusion. Cragun and his coauthors ask good questions about the tax status of churches. Sadly, the resulting article is marred by mistakes of fact and law and lack of familiarity with the work that already exists about this topic. Whether and how religion (and, more broadly, tax-exempt organizations) should be subsidized by the government is an important topic, and one that deserves airing beyond the rarified world of tax policy people. Still, as I hope I’ve demonstrated, there is a certain level of homework that needs to be done before stepping into that discussion.
[fn1] Why not? Basically because I’m on vacation, and I’m writing this on my phone. And it’s kind of a pain to do Lexis research on a phone.
[fn2] For a lot of reasons, I assume he means 50% of expenditures, rather than revenue, maybe with some minimum distribution requirement, but maybe he doesn’t.
[fn3] Not, as Cragun writes, the “Internal Revenue Service tax code.” I apologize for the pickiness of this footnote, but that’s a mistake my first tax professor mentioned being annoyed by, and I share his annoyance. The tax law is written by Congress; the IRS administers it.
[fn4] Section 102.
[fn6] I’ll qualify this statement a little: some donations probably wouldn’t qualify as gifts, and would be taxable to a non-exempt church, but the vast majority would qualify as gifts.
[fn7] There’s an odd discursion here about the Mafia being able to use churches to launder money. Frankly, if any Mafioso is doing that, he or she really needs to hire better tax counsel. As I understand it, the purpose of money-laundering is to take dirty money, invest it in something, and get it back as clean money. Based on the constraints imposed by the tax law, a tax-exempt organization such as a church will lose its exemption if it operates for the private benefit of anybody particular. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). So laundering money through a tax-exempt seems like a really bad idea, at least if (a) you want your money back and (b) you want to maintain the exemption.
[fn8] Note that, in the wonderful world of tax law, a minister of the gospel can and does include non-Christian clergy.
[fn9] Section 107.
[fn10] Though I can’t answer the question of how much the parsonage allowance costs the government, I can at least provide Cragun and his coauthors some enlightenment: they started down this trail when they discovered they couldn’t find how much Rev. White paid in taxes. That’s clearly true: the Code prohibits the disclosure of tax return information by any government official. Section 6103. Unauthorized disclosure is a felony. Section 7213. But wait, you may be asking, how do we know how little GE paid in US taxes then? We don’t, actually. Journalists have tried to reverse-engineer the amount based on SEC filings.
[fn11] Moreover, in a number of religions—mine included—believers are expected to give a set amount. The bulk of my contributions to the Mormon Church consist of tithing, a donation of 10% of my income. Though there is some wiggle room about the income base on which I pay, the 10% number isn’t tax-dependant.
[fn12] You can look at this post of mine, and especially fn4, to run that down.