In Part One of this series of posts, I described how, except for a few notorious churches, enforcing a corporate income tax levy on these organizations would not likely have much impact, nor raise substantial money. In this second part, I will look at the issue of property taxes and tax-free housing allowances granted to many ministers, as well as a mysterious and “excise tax” that might be legally levied on offending not-for-profits.

Property taxes

Churches and other charitable not-for-profits own many billions of dollars’ worth of property in the United States that is usually exempt from state and local property taxes. This tax exemption is primarily a result of state laws, rather than federal or local regulations. Some states have made waves to try to dig into that tax preference, most notably Maine in 2015. [1] These efforts have mostly proved unsuccessful, although local authorities frequently “nip around the edges” when it comes to idle property or ancillary properties like parking lots and parsonages.

In communities where the tax exclusions on large charitable properties like hospitals and schools place a big financial burden on strapped municipal budgets, negotiated voluntary payments are often arranged in order for the organization to exhibit its community support and to maintain cooperation with police, fire and road maintenance authorities. Whether this support is a “fair share” is often a contentious issue in local governments, who must manage the often-substantial budgetary impacts of state tax-exclusion mandates.

Since this tax exclusion power is decentralized to the state level, it is difficult to see any significant effort at changing the rules being successful. The little church on the corner, and the large megachurch housed in an old stadium or “big box” store, will likely keep its tax-exempt status well into the future. That said, when it comes time to talk budgets in city council meetings, the direct dollar impact of the community’s largest tax-free property holdings should be front and center. This is a tax subsidy funded by local taxpayers, and a bit of public airing of the per-household impact would often be a good thing.

This policy of transparency might also incentivize the biggest recipients to negotiate larger contributions to municipal budgets. All it takes is for a few citizens to estimate, using their own tax bills, what the size of the subsidy is for some of these properties, and present this to their elected officials for an open, on-the-record discussion.

Tax-free housing allowances

In the prior post I noted the hearings conducted a decade ago by Iowa senator Chuck Grassley that uncovered, and then dropped without any action on, widespread spending abuses by large independent megachurches and television ministries. One expense widely abused then, and still, is the ability of churches and church-related educational institutions to designate a portion of salary for ministers, as well as certain faculty and administrators with ecclesiastical status, as a tax-free “housing allowance” in lieu of providing a parsonage. The minister is also then treated as self-employed, which again saves the church or school money from paying the employer half of the Social Security payroll tax, but then puts a higher tax burden on the minister himself or herself.

Whether this is good or bad tax-wise for the minister depends on his or her ability to maximize the value of the allowance, which limited to the fair rental value of the residence, versus the extra self-employment tax hit. If you live in a million-dollar mansion, it is a sweet deal, but for many it is not.

This tax provision has a long, bi-partisan history. Baptists, for instance, have historically supported this housing allowance because they have been less inclined to provide a parsonage for the minister’s family than are some other denominations. Catholics support the extension to colleges and university professors, who often do “double duty” as practicing priests.

Senator Grassley uncovered in his hearings cases of several hundred thousand dollars of income sheltered by megachurch pastors by this tax break (which buys a pretty nice parsonage in some megachurches). This provision has been under attack as unconstitutional for many years, and there may soon be a ruling to end this practice. [2]

This is a complicated tax topic and beyond the scope of this post, but like the property tax issue, this provision has enabled many small churches and college to remain financially solvent by paying below-market salaries and keeping operating budgets low, which has not necessarily been a good thing for church employees. And any changes would likely roll off the back of the large megachurches but could devastate “the little church on the corner” and many struggling private colleges. In my view, eliminating this would be a good thing, but the phasing out would need to be managed carefully, as it has become a complex embedded fiscal problem for many institutions. [3]

Excise taxes and other alternatives

The official IRS guidance on the Johnson Amendment contains a curious potential remedy against violators via “the imposition of certain excise taxes.” Section 4955 of the IRS code allows for the imposition of a special tax on not-for-profits based on the value of any political expenditures made in violation of the rules. The tax is levied on both the organization and the managers, ranging from 12.5% total up to 150% for uncorrected violations. This tax has only rarely been assessed, if ever. I have found a case where the NAACP was once assessed an amount, but it was apparently rebated after a successful appeal.

There is a technology problem here that did not exist when the Johnson Amendment (named after Lyndon, by the way) was passed. Much “political speech” these days in done via the power of free media and social networking applications like Facebook and Twitter. So, what exactly do you tax when an influential pastor tweets his support of a particular candidate to thousands of people?

In my view, the larger financial harm here is found in what I earlier called the “quasi-profits” when they are substantial. This primarily occurs when an organization’s not-for-profit status hides above-market salaries and excessive payments to outside agencies like public relations firms or fundraisers. Let me suggest that an appropriate reform of these regulations would be to tax all corporate executive salaries (whether for-profit or not-for-profit) over some absolute base amount, or perhaps a percentage of the median employee salary, and tax fundraising costs and public relations costs for charities over some base percentage of revenue. These items are typically where the “quasi-profits” are buried. In for-profit companies, excess managerial salaries are better seen as a distribution of untaxed profits and are big drivers of rising income inequality in the United States over the last 30 years. [4]

The larger obstacle

In summary, the “problem” of not-for-profits and their political speech may not be in how to tax abuses of that privileged corporate state. Rather, it is in how we find the political will to address those abuses. The latter is in very short supply.

Notes:

1. Povich, Elaine S. “Should Nonprofits Have to Pay Taxes?” Pew Stateline, 5 Mar. 2015.
2. Shellnutt, Kate, et al. “5,000 Pastors Rally to Defend Housing Tax Break Ruled Unconstitutional.” Christianity Today, 23 Apr. 2018.
3. Disclosure: I have been paid under some of these provisions in past employment in exchange for below-market compensation. My “accountant self” disliked it then, and I won’t shed any tears if it is phased out.
4. I looked at this phenomenon in a series of posts back in January.