Tax exemptions may not be the most common issue facing courts in arguments over the separation of church and state, it is one of the most fundamental. Initially it appears to be a form of government support for religions and religious activities; on the other hand, the power to tax is the power to restrict or destroy, so is exempting religions from taxation a means of ensuring their independence?
Religious exemptions from taxation is no trivial matter. It is estimated that churches and other religious bodies may own anywhere between twenty and twenty-five percent of all of the land in the United States. This represents a huge portion of the possible tax base and billions of dollars in potential revenue which could be used to fund schools and other portions of the social infrastructure upon which the churches depend, just like the rest of us. The assets of the Roman Catholic church alone exceed those of the five largest American corporations combined and cash donations to churches total tens of billions of dollars every year.
Every dollar not paid by churches or other religious organizations must be made up from some other source. When all tax exemptions are taken into account, it is estimated that the average family may pay up to $1,000 in extra taxes every year to make up for the lost revenue not received from churches and religious groups. This includes sales taxes, inheritance taxes, income taxes, personal taxes, and ad valorem taxes.
It is thus arguable that all of this money represents an indirect contribution to all of those religious organizations. Because taxes which would go to pay for their share of maintaining society are made up for by the rest of us, they are free to use that money in other ways, for example promulgating their message to a wider audience. They certainly have a right to spread their ideas wherever they wish, but do they also have a right to public assistance in doing so? We have, then, two inter-related objections to religious tax exemptions: they represent a huge amount of money which must be made up by everyone else, and filling that gap may constitute indirect subsidies paid by the public to religious institutions in violation of the separation of church and state.
Tax exemptions for religious groups have existed throughout American history and are a legacy of our European heritage. At the same time, those tax exemptions have never been total or automatic. For example, some states have broad tax exemptions for parsonages while others have narrow restrictions on such exemptions. Some states have exempted Bibles from sales taxes while others have not. Some states have exempted church businesses from state corporate taxes while other have not. Private donations to churches have also had varying degrees of tax exemptions, while direct payments to churches for goods or services are rarely exempt from taxes.
Over the years both the courts and various legislative bodies have limited the ability of religions to benefit from tax exemptions. There are appear to be two possible means for this: either by generally eliminating tax exemptions for all charitable and non-profit groups, or by eliminating churches from the classification of charities.
Eliminating tax exemptions for charities generally would provide a great deal more money for governments, which is part of the argument for eliminating tax exemptions for religion. However, it is unlikely that there would be much broad public support for such a radical change in the tax code. Tax exemptions for charitable organizations have a long history, and for the most part, people tend to have a favorable impression of them.
The latter option, re-conceiving the idea of charities such that churches and religions would no longer be automatically included, would probably encounter just as much resistance. Currently, churches receive an automatic charitable tax exemption which is not available to other groups an unfortunate preference. Should churches actually have to demonstrate that they are doing charitable work that entitles them to tax exemptions on their own merits, it is unlikely that they would receive the same extensive benefits as they currently do.
However, even when religious groups are not involved with any work traditionally regarded as charitable like feeding the poor or cleaning the streets but instead focuses upon evangelization and religious study, people still tend to feel that that qualifies as charity. After all, those groups are trying to save the souls of others, and what could be more important?