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School Finance 101: Time to Tax the Churches!

On June 30th 2020, the U.S. Supreme Court determined that if a state has a program of providing public financing for private entities to provide educational services, that program cannot exclude from participation any institution simply because that institution is religious (see Espinoza v. Montana Department of Revenue). The decision involved a taxpayer financed tuition tax credit program providing vouchers for children to attend private schools, which under the state’s constitution (Blaine amendment), prohibited use of those vouchers at religious schools. This decision followed an earlier SCOTUS decision that prohibited Missouri from excluding religious institutions from access to a publicly financed program for playground refurbishing. These cases combined reverse a long history of state enforced Blaine Amendments which excluded the use of taxpayer dollars for religious institutions, even where taxpayer dollars were available to other private providers.

Of course, one difficulty with such provisions is having the government play any role in defining what is, or isn’t religion, when determining whether a tax benefit or public financing should be bestowed on an institution. Jedi? Religion! Church of the Flying Spaghetti Monster? Religion!

There are other examples where state governments bestow tax benefits on institutions simply because, exclusively and explicitly because of their status as “religious,” and regardless of other religion neutral criteria. These too have, to date, been upheld by established case law. But we argue that Espinoza which upended the established case law on Blaine Amendments also upends established case law on any state program which provides a tax benefit on the basis of religious status alone.

You ask – what could they possibly be talking about, and how could this be a big deal? Among other things, most if not all states provide for religious institution exemptions  from local property taxes. Churches, their often elaborate physical facilities, the land on which they sit is often exempt from property taxation by municipalities, school districts, etc., under state laws. Indeed, other types of institutions are also exempted in many cases, but churches and religious institutions are given their own separate status under these exemptions.

In New Jersey, schools and colleges, historical societies, libraries and other publicly held lands/buildings along with some service oriented non-profit organizations may quality for similar tax exemption, in accordance with religion neutral qualifications. Portions of land/buildings leased for to for-profit entities and/or for purposes not otherwise tax exempt may be subject to taxation. New Jersey law (NJ Rev Stat § 54:4-3.6 (2013) ) explicitly states: “all buildings actually used in the work of associations and corporations organized exclusively for religious purposes, including religious worship, or charitable purposes.”[1] Kansas law similarly provides explicit exemption for religious properties:

79-201. Property exempt from taxation; religious, educational, literary, scientific, benevolent, alumni association, veterans’ organization or charitable purposes; parsonages; community service organizations providing humanitarian services; electric generating property using renewable technology; landfill gas and production property.[2]

That is, religious institutions, regardless of whether they qualify on other religion-neutral grounds are granted exemption. Religious worship, per say, is presumed to be a non-profit community/public service, simply because it is “Religious,” even if that activity would not otherwise qualify.  

We are certainly not the first to raise this issue. But to reiterate, as much as these exemptions have been argued by some as absolutely untouchable as a form of religious freedom, or grudgingly untouchable by others as upheld in existing case law,[3] Espinoza changes all of this, and provides clear path toward taxing the churches.

If a state cannot exclude from access to taxpayer resources institutions simply because they are religious, a state also cannot exclude from taxation, institutions simply because they are religious. Indeed, to the extent that properties on which private schools operate are exempt, then this exemption would also apply to properties on which private religious schools operate. But the exemption would not extend to the church itself, or for example, rectories, religious retreats or other lands and buildings used solely for “religious” activities, including worship. The state cannot define religious activity in-and-of-itself to qualify as public service because the state should not be in the business of defining “religion,” and bestowing differential benefits on that basis alone.

Religion neutral exemptions for service oriented non-profits may include religion neutral regulations, such as non-discrimination requirements that may lead to the exclusion of some (if not many) religious institutions, including schools, from tax exemption. Such was the case in the revocation of non-profit status by the IRS of Bob Jones University. The Bob Jones case speaks to the broader point that religion in-and-of-itself cannot be classified by government as necessarily benevolent, thereby qualifying under a “benevolent neutrality” doctrine[4] (per non-profit qualifications). However, a recent SCOTUS decision raises questions about whether these regulations can be enforced. All the more reason to tax the churches.

Who pays the price for these unlawfully bestowed tax benefits? Other local property owners, who must pay higher taxes to offset the reduced overall tax base, and all other taxpayers in the state where state general funds are used to offset differences in local fiscal capacity. These taxpayers should, simultaneously, across multiple jurisdictions begin to file suit to recover these damages, and mitigate any future damages.





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Bruce D. Baker

Bruce Baker is Professor and Chair of the Department of Teaching and Learning at the University of Miami. Professor Baker is widely recognized as the nation’...