In a surprising ruling, a federal judge held Friday that the nearly century-old housing allowance exemption for "ministers of the gospel" violates the First Amendment's Establishment Clause "because the exemption provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise."
Judge Barbara Crabb of the U.S. District Court for Western Wisconsin further stated that in Freedom From Religion Foundation v. Lew:
Because a primary function of a “minister of the gospel” is to disseminate a religious message, a tax exemption provided only to ministers results in preferential treatment for religious messages over secular ones. ... If Congress believes that there are important secular reasons for granting the exemption in § 107(2), it is free to rewrite the provision in accordance with the principles laid down in Texas Monthly and Walz so that it includes ministers as part of a larger group of beneficiaries. ... As it stands now, however, § 107(2) is unconstitutional.
In other words, a broader housing allowance exemption that extended beyond ministers could be constitutional, such as that found in § 119, which is applicable when "the employee is required to accept such lodging on the business premises of his employer as a condition of his employment”.
Paul Caron at the TaxProf Blog has a nice round-up of the reactions from legal thinkers and earlier scholarship on the topic. And Sarah Pulliam Bailey at Religion News Service has an excellent account of the consequences of Judge Crabb's account for religious employers and ministers:
The clergy housing exemption applies to an estimated 44,000 ministers, priests, rabbis, imams and others. If the ruling stands, some clergy members could experience an estimated 5 to 10 percent cut in take-home pay. . . .
Churches routinely designate a portion of a pastor’s salary as a housing allowance. So, for example, a minister that earns an average of $50,000 may receive another a third of income, or $16,000, as a tax-free housing allowance, essentially earning $66,000. Having to pay taxes on the additional $16,000 ($4,000 in this case), would mean an 8 percent cut in salary.
The exemption is worth about $700 million per year, according to the Joint Committee on Taxation Estimate of Federal Tax Expenditure.
To be sure, Judge Crabb's decision is not binding on other judges (and has been stayed in the case before her pending appeal). But if the Seventh Circuit affirms Crabb's decision, ministers in Illinois, Indiana and Wisconsin would be unable to claim the housing allowance exemption under § 107. That is, unless they need to live on the church property for their job, housing allowance would be part of their total taxable compensation.
But the Seventh Circuit also could reverse Judge Crabb's holding, as it did two years ago in a case likewise commenced by the Freedom From Religion Foundation. In the earlier case, Judge Crabb ruled that the National Day of Prayer was unconstitutional. The appellate court reversed because the Freedom From Religion Foundation lacked standing to bring the case.
Standing also tends to provide a high hurdle in claims brought generally by taxpayers, but ths Supreme Court has said there is a little more leeway for Establishment Clause cases involving taxpayer expenditures. (See "Legal Standing Under the First Amendment's Establishment Clause".) It will be interesting to see how this one plays out.
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