Religious groups, like other not-for-profit organizations, enjoy tax-free status. They do not have to pay taxes on the donations they receive and are usually exempt from state taxes on the goods they purchase and local taxes on land they own. Individual clergy, however, must pay federal and state income taxes.
Occasionally, the suggestion is made that churches ought to be taxed. Religious groups have amassed great wealth. Some suggest if we taxed them we could balance the budget.
No state has seriously considered the notion of directly taxing churches. Many states do tax churches if they are involved in for-profit ventures unrelated to their religious mission, but otherwise the general tax exemption afforded churches if fairly safe.
The issue of taxing churches is not without controversy. In order to remain tax free, churches must refrain from getting too heavily involved in politics. For instance, groups considered non-profit by the Internal Revenue Service may not endorse candidates for public office. Also, they may not attack someone running for public office to the extent they effectively endorse his or her opponent. This is a gray area. Some churches are known for their political activism, and many have been accused of going too far in their political activities.
In 1991, the IRS conducted a lengthy investigation of Jimmy Swaggart and found him guilty of violating IRS rules by twice endorsing Pat Robertson for president during the 1988 campaign. He was not fined monetarily but was ordered to sign a statement promising to refrain from intervening in future campaigns. This was during a time when he was involved in a sex scandal, and the IRS may have seized the opportunity of human frailty to warn others about mixing religion with politics.
In contrast, Jerry Falwell was fined $50,000 after the IRS determined that the Old Time Gospel Hour had illegally channeled money into a political action committee that gave money to conservative congressional candidates. The IRS revoked his tax-exempt status retroactively for 1986 and 1987.
Many religious groups still think politics is a dirty business in which churches should not be involved. Jehovah’s Witnesses and some other fundamentalist denominations take an extreme position and refrain entirely from getting involved in politics. Some of their members do not vote.
The courts have ruled that there is no legal barrier to taxing churches and other religious groups or other secular non-profit organizations. In 1971, the Supreme Court ruled that it is not unconstitutional for states to give churches tax exemption. The Court merely said that it does not violate the Establishment Clause of the First Amendment.
Another marginal question is issue based political involvement. For example, several Catholic parishes openly endorsed in their church bulletins, candidates who held anti-abortion positions for state and federal offices. In the fallout from this, Catholic hierarchy issued memos warning clergy not to endorse candidates; form political action committees; or distribute campaign literature. The image of the IRS as a fierce bureaucracy may be true for some groups and individuals, but it has played the game softly with churches.
The logic of tax-exempt status for churches or other religious groups is that most provide many charitable and humanitarian social services. Government believes these services provide a valuable safety net for society and reduce some of the burden on the state. If the church provides shelter for the homeless, food for the hungry and elderly, and care for orphans, those are services government does not have to provide. The government does not want to, nor should it, discourage the social mission of churches by imposing burdensome taxes or penalties on them.