Why Churches Are Tax Exempt In America

Religious institutions are exempt from taxation because our government has not been given the power to govern religion. This is an expression of the basic principles behind the founding of this country—that is, there is an Authority above the government that has established rights apart from the government, including free speech and freedom of religion. Since these rights were not created by the government—and, in fact, existed before any government existed—our government is restrained from infringing on these natural rights. There are things that are simply not rightly under any government’s control. To reverse this long-standing practice of tax exemption is to wrongly place the government in authority over religion.
 
—Amy K. Hall, “Why Religious Institutions Aren’t Taxed

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  • R. Scott Clark
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    R.Scott Clark is the President of the Heidelberg Reformation Association, the author and editor of, and contributor to several books and the author of many articles. He has taught church history and historical theology since 1997 at Westminster Seminary California. He has also taught at Wheaton College, Reformed Theological Seminary, and Concordia University. He has hosted the Heidelblog since 2007.

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12 comments

  1. But because gov’t, and correctly so, does not have the power to govern religion, religious institutions get a free lunch. They get the benefit of gov’t nonregulartory services, such as protective services, without have to pay for them. In this, they share a similar plight to some corporations that do all they can to avoid paying taxes. And as coincidental a connection as that seems, historically speaking, the ties between the Church and elites, whether public or private sector ones, have made the Church an enemy in the eyes of many who have been or currently are marginalized. And this is especially true when the Church is fashioned to serve itself and be insular rather than serving those outside the Church.

  2. R. Scott Clark,
    But the Church does make its living off the donations of its members. In addition, if we applied your logic to the Church’s payroll, couldn’t we also argue that Church employees should not have to pay taxes as well?

    In addition, the same argument could be made about any business. Why should businesses pay taxes when their employees already do? However, history teaches us that to shift a gov’t’s tax revenue down to those with less from those with more not only can cause economic hardship or collapse, it can cause political and social instability if not rebellion.

    To Jim Heetderks.

    With such scant info, we couldn’t judge the 45% of Americans who do not pay federal income tax as a whole. But when we look at them as individuals, we find that some use the law to reduce or eliminate the paying of taxes while others can’t afford to pay taxes if they are to survive. In which group do churches belong and why?

    • Curt,

      Yes, the church as a corporate enterprise (and her ministers) does subsist upon the gifts of gifts of her members but churches are rightly designated NON-PROFIT organizations. The church does not create material wealth, she does not generate profits that may be taxed. People donate out of their funds that the government is already taxing at a cumulative rate, in many cases, at a rate of 40%-50%. Calculate all the ways in which God’s people are already taxed: gas taxes, property taxes, utility taxes, phone taxes, income taxes, death taxes. The Beatles had it right when they complained:

      Let me tell you how it will be
      There’s one for you, nineteen for me
      Cos I’m the taxman, yeah, I’m the taxman

      Should five per cent appear too small
      Be thankful I don’t take it all
      Cos I’m the taxman, yeah I’m the taxman

      If you drive a car, I’ll tax the street
      If you try to sit, I’ll tax your seat
      If you get too cold I’ll tax the heat
      If you take a walk, I’ll tax your feet

      Taxman!
      Cos I’m the taxman, yeah I’m the taxman

      Don’t ask me what I want it for (Aahh Mr. Wilson)
      If you don’t want to pay some more (Aahh Mr. Heath)
      Cos I’m the taxman, yeah, I’m the taxman

      Now my advice for those who die
      Declare the pennies on your eyes
      Cos I’m the taxman, yeah, I’m the taxman

      And you’re working for no one but me
      Taxman!

      Businesses, by contrast, are PROFIT-making enterprises, or at least they intend to be if the ever-growing Leviathan will allow it. People invest in their own businesses (and sometimes others do) and they hope that, by providing goods and/or services, customers will see value in their product/services and will buy them for more than they cost to offer. What’s left over is profit. Churches don’t operate that way. The funds they receive are not profits (I’ve worked in the non-profit sector since 1987 and the emphasis is on non-profit). What the church receives is spent on overhead (rent/mortgage, equipment, maintenance, salaries etc) and services (e.g., ministry of the Word, mission) and poverty-relief (diaconal relief) in the congregation and the like.

    • Curt,

      Your question makes no sense since your first talk about two groups of individuals and then ask to which group the church, a corporate entity, belongs.

      As to the paying of taxes, I agree with former federal judge Learned Hand when he said “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

      As for businesses paying taxes (assuming you’re referring to income taxes) most businesses do not pay income taxes, by design. Partnerships and S-corporations pay no income tax whatsoever, since they pass the net income to their ultimate owners, individual taxpayers. As for corporations that do pay income taxes (C-corporations), ultimately these taxes are borne by either the consumers of products or the owners of capital, and economists are divided as to how the burden is divided between the two groups. So if you think that hefty corporate income taxes will somehow lift the burden on the poorer members of society, I believe you are mistaken.

  3. The power to tax is the power to claim a certain dominion or “lordship” over the entity subject to such taxation. If the government were to strip churches of their tax exempt status, it would, in effect, be claiming a certain dominion over those churches. It would involve Caesar trying to dethrone Christ as King and Head of the church. And a case could be made that churches which complied with such punitive taxation would, in effect, be proclaiming by their compliance “Caesar is Lord.”

    • Geoff,

      Reading between the lines, I take it you are concerned that churches risk losing their tax-exempt status based on a religious belief, that of refusing to perform or recognize same-sex marriages. My own opinion is that this will not happen, though nobody will be surprised when such practices are challenged in court. For various reasons courts and governments have been reluctant to look closely into the details of a particular church’s doctrine and discipline. While I realize that many things in our culture have changed for the worse and we live in strange times, and thus anything can happen, exemption from taxation for churches has been a fact for as long the country has been in existence and I don’t see it going up in smoke any time soon. But maybe I’m too optimistic.

      Things may be different for other religious institutions, such as colleges or para-church organizations. They have a somewhat different status than churches under the tax code. And churches could lose certain indirect benefits such as the deductibility of contributions by its members. But that’s different than a church losing its tax-exempt status.

      In any case, even if a church had to file a tax return as a for-profit entity, I’m pretty sure the more savvy tax preparers among us could work it out so that there would be no taxable income and thus no tax to pay. This might drive Curt Day crazy but it would all be perfectly legal.

  4. The position of churches not being subject to taxes as an entity has substantial social, political, and theological standing. However, I am curious about another side to this discussion, where individuals receive tax breaks for making contributions to churches. While this is certainly a blessing to the church, I wonder the price churches will have to pay for it in the future. For instance, IRS 501(c)(3) requirements are stringent (and, admittedly, more stringent for non-church entities than for church entities), evidenced by unforgiving government-mandated reporting and compelled cooperation with particular government requirements. The current scenario basically has churches receiving a benefit from the government (tax-exempt contributions) in exchange for giving up some autonomy to the government (reporting and cooperation). The government has the legal ability to change those requirements at any whim, and churches and other non-profits could be subject to restrictions on freedom of speech (they already are increasing feeling this pressure and always have in areas of political speech) in areas that the church has a God-given mandate to speak to. In other words, the church may (and, in my view, probably will) one day face the choice: do we speak to an issue outlawed by IRS regulations and thereby discard our privileged status to be able to proclaim the whole counsel of God, or do we cower at the government pressure to abstain from making certain proclamations about subjects outlawed by the government? At the end of the day, church members’ privilege to receive tax breaks for charitable contributions is subject to politics only, and we need to be preparing ourselves to pay taxes on all of our income, including our tithe. It’s a sacrifice we may have to make to stay faithful to the gospel.

    • JP,

      When you say “The current scenario basically has churches receiving a benefit from the government (tax-exempt contributions) in exchange for giving up some autonomy to the government (reporting and cooperation),” that’s not quite right, because churches are not required to file the annual IRS Form 990, unless for some reason they elect to do so. Every other tax exempt organization is required to file a 990. Churches do need to follow certain IRS rules so that the contributions are in fact deductible by the donor.

      But if for some reason contributions no longer were deductible (and there are reasons this could happen that are not necessarily related to what churches publicly profess or not), the magnitude of the impact would depend on the particular congregation. In congregations where few people itemize their deductions it might not matter very much. In congregations where a substantial part of the income is from people who itemize, then the question is whether people will decrease their giving because of the loss of a deduction. Some would, but I suspect others would continue to faithfully tithe or give the same regardless of deductibility.

      In the congregation I serve as a deacon, I estimate that far better than half of our income comes from people who itemize, so we would raise the issue with the congregation and encourage people to support the budget regardless of tax consequences. I think we’d end up no worse off; but I’d rather we not be put to the test!

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