Nonprofits face recurring political pressure to justify their tax-exempt privileges. In the wake of the U.S. Supreme Court’s Obergefell ruling that a fundamental right to marry exists for same-sex couples, some religious organizations have questioned whether their Section 501(c)(3) tax-exempt status may come under attack, to the extent that they object to sexual orientation civil rights protections and notwithstanding their religious beliefs regarding human sexuality. Property tax exemption for nonprofits is a related area under increasing opposition, as noted in our law firm’s article on “PILOTs.” Both income and property tax exemptions are extremely well grounded in history, tax law, and underlying rationales, as follows.
Religious tax exemption has a lengthy historical precedent: ancient regimes ranging from Sumer to Babylon, Egypt, Israel, Persia, and India provided tax exemption for the property of churches and priests. American theories of tax exemption are derived from English law, which recognized exemption for both religious and charitable institutions and identified religion as benefitting an indefinite charitable class.
These concepts have likewise permeated American society. As the U.S. Supreme Court observed in the landmark case of Walz v. Tax Commission, specifically with respect to religious institutions’ unquestioned tax-exempt status:
Few concepts are more deeply embedded in the fabric of our national life, beginning with pre-revolutionary colonial times, than for the government to exercise at the very least this kind of benevolent neutrality toward churches and religious exercise generally, so long as none was favored over others and none suffered interference.
This kind of benevolent neutrality is also embedded in state law – all fifty states and the District of Columbia currently provide for religious tax exemption through statutory or constitutional provisions. Other faith-based, charitable, and educational nonprofits enjoy similar tax exemptions. While historical tradition alone cannot suffice as the sole rationale, the long-standing and long-reaching history of tax exemption – particularly for religious organizations – provides a persuasive argument for its continuation.