Whether Piety or Charity: Classification Issues in the Exemption of Churches and Charities from Property Taxation

The law governing tax exemption of church property illustrates the problem of classifying institutions and activities of the independent sector along religious lines. The “independent sector” is comprised of a variety of institutions, like families, schools, charities, churches, corporations, clubs, and others. Religion assumes a variety of forms and functions within these institutions, ranging from the incidental to the indispensable. The law, however, requires that sharp distinctions be drawn between “religious” and “non-religious” institutions and activities.Such distinctions are required by state statutory law. Historically, two separate bodies of state law governed tax exemption of church property: (1) a body of common law, which accorded such exemptions to church properties based upon the religious uses to which they were devoted, and (2) a body of equity law, which accorded such exemptions to church properties based upon the charitable uses to which they were devoted. Currently, only one body of state statutory law governs such exemptions, yet exemptions remain based on either the religious uses or the charitable uses of a property. State officials are thus required to distinguish between piety and charity, religion and benevolence, to determine whether and on what basis a petitioner’s property can be exempted from taxation.Such distinctions are also required by federal constitutional law. The Constitution of the United States permits government regulations of various non-religious institutions and activities, provided such regulations comply with generally applicable constitutional values. It permits governmental regulation of religious groups and activities, only if they comply with the specific mandates of the establishment and free exercise clauses of the first amendment. State tax exemptions for religious institutions and religious uses of property, therefore, require separate constitutional treatment.The religion clauses of the first amendment, as currently interpreted, appear to offer conflicting directives on tax status of church property. The establishment clause has been interpreted to forbid government from imparting special benefits to religious groups. The free exercise clause has been interpreted to forbid government from imposing special burdens on religious groups. The free exercise clause has been interpreted to forbid government from imposing special burdens on religious groups. Neither the exemption nor the taxation of church property appears to satisfy the principles of both clauses. To exempt church property, while taxing that of other non-religious groups, appear to violate the “no special benefit” principle of the establishment clause. To tax church property, while taxing that of other non-religious groups, appears to violate the “no special burden” principle of the free exercise clause. To tax church property, while exempting that of other charitable groups, appears to violate the “no special burden” principle of the free exercise clause. In Walz v. Tax Commission (1970), the United States Supreme Court held that tax exemptions of church property, while neither proscribed by the establishment clause nor prescribed by the free exercise clause, are constitutionally permissible. In more recent cases involving federal income taxation and state sale and use taxation, however, the Court has called this precedent into serious question.This Article retraces the history of tax exemption of church property in America and analyzes current patterns of tax exemption litigation and legislation in light of this history. Part I analyses the common law and equity law sources of tax exemption law, the challenge posed to these laws by early state constitutional provisions, and the rise of the modern theory and law of tax exemption of church property that emerged in response to these challenges. Part II analyzes briefly new trends in litigation over the tax exemption of church property, particularly in cases raised by new religious groups, which have sought to avail themselves of the same protections enjoyed by traditional religious groups. Part III poses an alternative to the current reforms of tax exemption law now being debated and analyzes this alternative provisionally in light of historical exemption laws and current constitutional interpretations.