Engrained in the United States’ political structure is the understanding that Congress engages in social engineering through the tax laws. This means that through tax subsidies, the government tries to encourage or discourage certain behavior. For example, the tax laws provide a mortgage interest deduction in order to incentivize home ownership, and alcohol is taxed in part to discourage its consumption.
This week’s column will focus on what is commonly referred to as the “parsonage allowance” and a recent federal district court ruling that concluded that that particular provision of the tax laws violates the Constitution. On a technical level, what does the ruling mean for synagogues trying to structure compensation packages for their rabbis? From a broader perspective, what does the ruling say about our country’s current views about historical tax and governmental preferences given to religious organizations?
For close to a century, the U.S. tax law has allowed members of the clergy to exclude from taxable income a portion of their church or synagogue compensation that is used for housing costs. This is like having a tax-free health savings account or another tax-free fringe benefit for housing costs. The public policy supporting this subsidy is readily apparent, as the country’s clergy not only helps guide our society’s moral and ethical behavior, but also provides counseling, education and other social support services. These important functions, coupled with historically low compensation paid to clergy, justifies this special treatment.
At the end of 2012, a U.S. district court judge in Wisconsin ruled that the tax provision providing the income exemption was unconstitutional. A group of atheists called the Freedom From Religion Foundation, Inc. brought the lawsuit.
Surprisingly, the court ruled that the provision was unconstitutional on its own motion without waiting for the plaintiffs to make their motion. The judge determined that the income tax exemption favored “religious persons only” and excluded “secular” persons. Consequently, the court held it violated the establishment clause of the First Amendment to the Constitution, which, as stated by the judge, “requires neutrality not just among the various religious sects but between religious and secular groups as well.”
While the ruling does not take effect immediately, and addresses only cash housing allowances and not rabbis and other clergy who live in synagogue- or church-provided housing, the decision could have implications if it is not appealed by the government. Synagogues may need to re-design compensation packages to do without this historically important aspect of the rabbi’s salary.
From a broader perspective, one has to wonder whether the ruling represents a deeper assault on long-standing governmental benefits that do not harm others
financially but do specifically provide a means to help compensate undercompensated religious leaders or provide other benefits, such as other tax exemptions or governmental preferences.
This ruling could pave the way for further dilution of the housing allowance provision and other third-party challenges to other benefits afforded to religious organizations on the federal, state and local levels.
Charles M. Ruchelman is a member of the tax and litigation boutique law firm of Caplin & Drysdale in Washington, D.C.