Churches and Property Tax Exemptions

While many of us that work in the nonprofit/tax-exempt world focus on federal tax exemption policy under I.R.C. Section 501(c)(3), we shouldn’t forget that a major part of the “law” on tax exemption occurs at the state and local level in cases dealing with state property tax exemption.  In fact, when it comes to the exempt status of nonprofit hospitals, states generally have been in the forefront of these issues, beginning with the famous Utah County v. Intermountain Health Care case decided by the Utah Supreme Court back in the mid-1980’s and continuing today with the Provena Covenant case in Illinois.  

An interesting story from the Rochester, NY, Democrat and Chronicle illustrates this “law on the ground” (both literally and figuratively) with respect to the difficulty local property tax assessors and review boards have with implementing property tax exemption for churches.  As the story notes, determining when real estate is used for religious purposes (and therefore exempt) is a very blurry line.  Particularly difficult are the cases that deal with undeveloped real estate which does not have any current religious use, but may (or may not) be used in the future for religious purposes.

I have my doubts that churches should get a general property or income tax exemption at all.  They are, at their core, more or less clubs for believers, and their income and assets overwhelmingly are directed toward benefiting church members, rather than the community (or nation) as a whole.  I think there is much to recommend an approach, which has been suggested by Rich Schmalbeck at Duke, that would limit exemption to money spent/property used for purposes OTHER THAN the congregation itself – such as helping the poor.  Nevertheless, as long as we continue to have laws that exempt religious organizations per se, understanding the difficulties facing local tax officials in dealing with exemption reality is worthwhile.

JDC