Home > Current Events > What would happen if your church lost its tax-exempt status?

What would happen if your church lost its tax-exempt status?

I’d like to pause from mining the Grassley staff report to entertain the question that has been much on my mind as I have read the report and commented on it over the last couple of weeks. What would happen to your church if it lost its tax-exempt status? And a bigger question: what if churches were no longer tax-exempt?

This isn’t just a one-many distinction. If one church loses its tax-exempt status it can just reorganize: start a new paper church in a different building, the people move and resume doing business as a different church. If they all lose their status then being a church is a different thing that it was before. It’s entirely possible that we will eventually see some of the former as a result of the Alliance Defense Fund’s Pulpit Initiative [PDF] or the ADF Pulpit Freedom Sunday [link] if the tax law regarding politicking doesn’t change. It is unlikely that we’ll see the latter in the next couple of years, but it’s possible we’ll see it eventually. Churches in the States just own way too much property and handle way too much money, as an aggregate at least.

Church tax-exempt status has four major aspects:

  • Business taxes
  • Property taxes
  • Pastoral provisions
  • Charitable contributions

Churches do not pay taxes like normal businesses (e.g. gross receipts) or property taxes; contributions to churches can be written off by contributors as charitable contributions, and of course pastors get some special breaks that under most circumstances are not loopholes. The first three if they were lost would be a drag on business; there would be less money left over for salaries, facilities, and ministries, and some churches that would otherwise struggle would fail outright.

Property taxes are already an issue for some churches; a surprising number of the cases the Alliance Defense Fund publicizes involve zoning ordinances; I have to assume that tax revenue is behind the various cities’ stances on zoning.

And of course business taxes are the real issue behind the next issue I’d like to discuss in the Grassley report. Many churches (meaning a large number, not necessarily a large percentage) have business interests that are tax-free because the church is exempt from income taxes. This happens in a lot of ways; remember Vineyard Christian Fellowship of Sacramento? The one we read about in the Wall Street Journal [link] a few weeks ago? They were also in the commercial real estate business; and they were neither a media ministry nor a megachurch.

But what about the last one: what if you couldn’t write off your tithe on your taxes? Would you still give? How many people in the roughly 20% of adults who keep your local church afloat would continue to give at their current levels if they couldn’t get a third of the money back at the end of the year?

I really don’t know. I don’t know how to characterize the people who keep a typical church afloat, much less how they view the tax deduction. Your friendly neighborhood economist would say that the rational thing would be for them to reduce their contributions according to their tax bracket, adjusted for the time value of the tax refund. I rather doubt that most of your 20% actually do that.

I really don’t have a feel for how the math works here; when I was a kid we more or less had a mental model of our tithe that went like this: when we dropped it in the offering plate it went to God, and if we paid by check we could write it off at the end of the year. Of course there are other, equally accurate descriptions of the process that are more complicated than that. I have no idea which would prevail if the story lost its tax refund clause.

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