As I sat down to write about a potential future in which churches and religious nonprofits lose their tax-exempt status, Time magazine was already on the beat. The calls to tax nonprofits that do not concur with the ruling in Obergefell v. Hodges have already begun. If you will allow me to indulge in a little speculation, I’d like to consider some of the possibilities that may lie ahead, raising issues that religious leaders and nonprofit executives need to be thinking about immediately in order to brace for a turbulent future. It goes without saying that many institutions will cave in to pressure to conform to the demands of the IRS, but for those that do not, the future is suddenly a lot more uncertain.
I suspect that the tax exemption for churches (as the government defines them) will last a bit longer and that there’s a decent shot that they will be allowed to maintain their exemptions over the long term. The constitutional and legal issues with taxing churches directly are thornier and harder to surmount, though the sweeping nature of Justice Kennedy’s rhetoric of ever-expanding, ever-progressing freedoms in his majority opinion in Obergefell should remind us not to get our hopes up. However, nonprofits such as religious hospitals, colleges, charities, and even secular policy nonprofits that take a stand on marriage issues might not have long before their tax-exempt status is revoked. When asked by Justice Alito during the Obergefell oral arguments whether this would be a logical outcome of the administration’s position, Solicitor General Donald Verrilli answered ominously: “It’s certainly going to be an issue. I don’t deny that. I don’t deny that, Justice Alito. It is it is going to be an issue.”
Efforts to introduce legislation to prevent this outcome may meet with some success on the state level in a handful of places, but the odds of such provisions taking hold on the federal level seem extremely dim. Few Democratic congressmen could be expected to support such laws, as their constituents increasingly view any protection of religious institutions as tantamount to discrimination. And it’s likely that many Republicans will shy away from becoming the next Governor Pence, who was slammed by the combined might of corporate America and the media establishment for advocating legislation that stated little more than that religious liberty is still a real thing. In this scenario states like Oklahoma or Utah might create their own definition of a non-profit separate from that used by the IRS in order to exempt religious nonprofits from some taxes. So BYU might owe a large chunk of money to the IRS, but escape state taxes and—crucially—property taxes that are owed to local, not federal, bodies.
Property taxes are an interesting case for churches, hospitals, and schools in particular, since such taxes are owed to local bodies which would have the authority to refrain from taxing such entities even if it became legal to do so. Even under the worst case scenario, the courts would likely be ruling that governmental bodies can tax churches and religious organizations, not that they must tax them. In more liberal states, you could imagine certain more conservative and religious municipalities, like Wheaton, IL, or parts of Orange County, CA, becoming tax-free havens for religion, consciously pursuing a strategy of welcoming religious communities both from conviction and in the hopes that churchgoers will move in or patronize local businesses as a result. If towns can give huge tax subsidies to big box stores on the theory that they will benefit the area, why not give one to the big Catholic hospital across the county line that’s looking for greener pastures?
This is all very abstract and speculative. So if you are in nonprofit leadership or donate substantial sums to religious nonprofits, what should you be thinking about in the coming months as the debate continues to unfold?
We can’t predict exactly how the political situation will turn out, or the extent to which religious nonprofits need to be concerned. There may even be silver linings. Not worrying about 501c3 status may mean that the mission of an organization can operate more freely and that it spends less time and fewer resources on regulatory compliance once the dust has settled. The only thing we can be sure of is that if in fact religious nonprofits start to lose tax exempt status, the biggest immediate winners will be lawyers and accounting firms.