One of the key arguments offered by those who oppose tax exemptions for churches and religious organizations is that tax exemptions constitute a type of subsidy for these groups. Subsidies for religious organizations are unconstitutional, however, because they represent a means by which churches are able to obtain public, taxpayer support for their religious goals.
But is this argument valid? There are a number of very important differences which exist between traditional subsidies and tax exemptions which need to be clarified. Most importantly, there is no exchange of money: at no time does the government transfer funds from the public coffers to a church or religious group. Instead, the government simply refrains from taking money from them.
Tax exemptions are open-ended in that the actual amount varies based upon how much supporters wish to contribute — there is no fixed amount as with subsidies. Tax exemptions also do not cause an organization to become an agency of the state in the same way that the direct payments of a subsidy can. Receiving a tax exemption is not like being on the public payroll.
There are, however, ways in which tax exemptions are like subsidies — or even represent greater benefits than subsidies do — even if they are fundamentally indirect in nature. For example, organizations receiving subsidies typically have to justify the transfer of funds on a yearly basis every time a new budget is created. Tax exemptions, however, are more or less permanent. Once an organization is granted a tax exemption, someone has to complain for it to be rescinded — and that is not often successful.
Charitable trusts under section 501(c)(3) of the Internal Revenue Code technically have to make their financial records available to the IRS for inspection, but it is rare that such a review ever occurs with a church because of the possibility that it might result in an excessive entanglement between church and state. Other organizations which receive direct subsidies from the government are not so free to keep their finances secret from the general public.
These and the other exceptions and exemptions which churches and religious organizations receive as a consequence of being charitable trusts all represent some sort of disadvantage to the community. Some disadvantages are surely slight while others, like the tax funds which must be made up by others, can be quite substantial. These disadvantages are borne by the community on the theory that there is some fair exchange — namely, the benefits which the community receives from the charity’s work.
Such work might include job training, operating a soup kitchen, or any number of other community services. Regardless of the exact nature of the charity’s operations, the principle remains the same: whether through direct (subsidies) or indirect (tax exemptions) means, the community provides support to an organization in the expectation that that organization will in turn provide both tangible (charitable work) and intangible (diversity) benefits to the community.
So, are tax exemptions a subsidy? There are important ways in which they are very much like subsidies and there are important ways in which they are not. The ways in which they are alike are probably why the Supreme Court has regularly treated tax exemptions as a type of subsidy. For example, in the 1983 case of Regan v. Taxation With Representation of Washington, the Court noted that tax exemption, credits, and deductions are “a form of subsidy that is administered through the tax system.”
The question is problematic, however, because it tries to paint a complex issue much too simplistically. It assumes that if tax exemptions are a subsidy, then they are unconstitutional. and if they are not a subsidy, then they are constitutional. Why assume that those are the only choices?
What’s missing from those choices is a deeper understanding of why direct subsidies for religious organizations are unconstitutional. The problem is not simply the act of money changing hands but the principle of a community of people being expected to provide support to the religious and theological mission of a church to which they do not belong and whose religious doctrines they have not adopted. Direct support may be a more egregious violation than indirect support, but that doesn’t mean that indirect support is acceptable.
If this analysis is accurate, then even if we cannot classify tax exemptions as a type of subsidy, that doesn’t mean that we must acknowledge them as constitutional. Instead, we should look more closely at just what type of support they cause the community to provide for churches to which they do not belong. Depending upon the nature and extent of that support, tax exemptions may well be unconstitutional, even if they differ in important respects from direct subsidies.