Excerpt from Lyles, et. al., Civil Liberties and the Constitution: Cases and Commentaries, 9th edition, 2011, pp. 259.

Tax Exemptions

Some people consider the longstanding policy of exempting church property from public taxation to be an unconstitutional aid to religious establishments. But when the Supreme Court made a definitive pronouncement on the issue in Walz v. Tax Commission of City of New York (397 U.S. 664, 1970), it found such a policy to be in furtherance of the state’s neutrality within the meaning of the establishment clause. The goal of tax exemptions was to help nonprofit institutions that the government regareded as important to the community. Chief Justice Warren Burger made it clear that the tax exemption “is neither the advancement nor the inhibition of religion”; rather, he contended, it is an indirect economic benefit that should be distinguished from the direct subsidy that produces the “excessive governmental entanglement” that the establishment clause prohibits. He also expressed concern for the burden on free exercise that levying a tax on nonprofit institutions would cause. PolS 354, agree, disagree?

In dissent, Justice William O. Douglas focused on the discrimination issue that was raised in the tax exemption policy. He discussed the nature of governmental subsidies and raised the question of whether religious bodies with their vast real estate holdings and their lucrative annual incomes should be allowed this government largess.

The New York law upheld in Walz did not embrace church property used for commercial purposes. However, shortly after Walz was announced, a federal district court in Florida used it as authority to sustain a Florida tax exemption for a church parking lot that was used commercially 6 days a week. Proceeds from the parking lot were used to support the church’s religious activities and charitable projects.

In Texas Monthly v. Bullock (489 U.S. 1, 1989), however, the Court held unconstitutional a Texas law that applied only to religious organizations. A strong dissent was issued by Justice Scalia.

An interesting controversy over tax exemption policy and its impact on the religious clauses was presented in Bob Jones University v. United States [PolS 358] and Goldsboro Christian Schools v. United States (461 U.S. 574, 1983). These church-related educational institutions resisted an Internal Revenue Service ruling denying them tax-exempt status because of their racially discriminatory admissions policies. The schools argued that their policies derived from their religious dogmas and that the tax exemption revocation amounted to a violation of both the free exercise and establishment clauses. But the Court rejected those claims, stating that the government’s interest in eradicating racial discrimination far outweighed any burden on free exercise that was alleged to result from the denial of a tax exemption benefit. The Court dismissed the establishment argument by simply noting that religion is not advanced merely because the tax exemption regulation happens to coincide with the tenets of religions that espouse racial intermixing. Hence the preference argument was without substance.