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Research Report:
How We all Subsidize Religion in
the United States
Free Inquiry June/July 2012 Vol. 32 No.4 Ryan T. Cragun, Stephanie Yeager, and Desmond Vega
The
home in this photo is the $1.75 million mansion of the Reverend Randy
White, the former head pastor of Without Walls International Church in
Tampa, Florida. While some people may be bothered by the fact that there
are pastors who live in multimillion dollar homes, this is old news to
most. But here is what should bother you about these expensive homes:
You are helping to pay for them! You pay for them indirectly, the same
way local, state, and federal governments in the United States subsidize
religion—to the tune of about $71 billion every year.
We mention Rev. White because he was the impetus for this article.
White and his mansion came up in a class taught by lead author Ryan T.
Cragun. In that discussion, the other authors asked how much Pastor
White pays in taxes on his income. The answer wasn’t readily available.
Only a handful of publications in the sociology of religion have
examined the finances of religions, and they are largely aimed at
telling religions how to increase donations.1 Nowhere did we find prior
research summarizing and detailing religious finances and tax policy, so
we decided to investigate it ourselves. This article is the result. It
took some digging, but we think we now have a moderately clear
understanding of the tax laws regarding religions in the United States.
What we found suggests that religious institutions, if they were
required to pay taxes the same as for-profit corporations do, would not
have nearly as much money or influence as they enjoy in America today.
In this article we estimate how much local, state, and federal
governments subsidize religions.
However, before we get into our calculations, we think it best to
address a criticism that is likely to be raised about this article. By
suggesting that these groups should pay taxes, we are likely to be
criticized by those who think that religions are largely charitable
institutions engaged in beneficial service or charitable work and should
therefore be exempt from taxes. This criticism requires responses at two
levels, because there are two ways to think about religious “charity.”
The first type of charity is the type that most people think of when
they hear the phrase “serving people’s physical needs” (feeding and
clothing the poor, building schools, and the like). The second type is
different and involves addressing people’s “spiritual concerns.”
Do religions engage in charitable work that addresses the physical needs
of the poor? Many do, but that is not their primary focus. Religions are
quick to trumpet when they do charitable work—ironically for Christians,
since the Bible explicitly says not to (Mathew 6:2). But they don’t do
as much charitable work as a lot of people think, and they spend a
relatively small percentage of their overall revenue on such work. For
instance, the Church of Jesus Christ of Latter-day Saints (the LDS or
Mormon Church), which regularly trumpets its charitable donations, gave
about $1 billion to charitable causes between 1985 and 2008. That may
seem like a lot until you divide it by the twenty-three-year time span
and realize this church is donating only about 0.7 percent of its annual
income.2 Other religions are more charitable. For instance, the United
Methodist Church allocated about 29 percent of its revenues to
charitable causes in 2010 (about $62 million of $214 million received).3
One calculation of the resources expended by 271 U.S. congregations
found that, on average, “operating expenses” totaled 71 percent of all
the expenditures of religions, much of that going to pay ministers’
salaries.4 Financial contributions addressing the physical needs of the
poor fall within the remaining 29 percent of expenditures. While these
numbers may be higher as a percentage of income than typical charitable
giving by corporations, they are not hugely higher (depending on the
religion) and are substantially lower in absolute terms. Wal-Mart, for
instance, gives about $1.75 billion in food aid to charities each year,
or twenty-eight times all of the money allotted for charity by the
United Methodist Church and almost double what the LDS Church has given
in the last twenty-five years.5
We recognize that there is a lot of variation in how much religions
engage in charitable work, and we don’t want to discourage religions
from doing so. However, comparing their charitable giving to the
performance of secular charities is informative. The American Red Cross
spends 92.1 percent of its revenue directly addressing the physical
needs of those it intends to help; only 7.9 percent is spent on
“operating expenses.”;6 If you use a generous 50 percent cutoff for
indicating whether an institution is primarily a charitable organization
or not (that is, they spend more than 50 percent of revenue on
charitable work addressing physical needs), we doubt there is a single
religion in the world that would actually qualify as a charitable
organization.
But what about the spiritual concerns that religions address? Isn’t this
activity a form of “spiritual charity”? And since most of the
expenditures of religions are spent on addressing spiritual concerns
(activities including worship services, pastoral counseling, baptisms,
sacraments, and the like), couldn’t these expenses be seen as
charitable, thus qualifying the religions as charities?
No. Why? Because charity is the giving of something, not the exchange of
something for something else. When religions give (money, clothing,
labor, building materials) to address the physical needs of the poor,
they are giving without receiving payment in return. There is no
exchange of goods or services. Yes, those giving may feel good about
what they’ve done, but that feeling is not given to them by the
recipients of their charitable actions in exchange for the actions; it
rather results from the charitable actions themselves. In contrast, when
a pastor preaches a sermon or a priest performs a baptism, this is done
out of obligation and is what these religious functionaries are paid to
do. It is no more “charity” than a college professor teaching a class or
a social worker helping a family is charity. If the people you are
helping are paying you to help them, it’s not charity; it’s labor. You
may like your job and feel that it offers value beyond what you receive
in compensation, but that doesn’t change the fundamental nature of the
exchange taking place. In short, if someone is paid to address spiritual
concerns, it is not charity when they do so.
There is one other argument religions could use to claim they are
“spiritual charities”: when religions pray for rain for the local
community or when they baptize the dead to assure them salvation—as is
done by the Mormon Church—isn’t this a form of spiritual charity in the
sense that even people not donating to the religion benefit? These acts
certainly seem closer to charity, but they don’t meet the criteria of
what it means to be a charitable organization for tax purposes: If the
function or service the charity provides were discontinued, would it
result in a legal requirement for public funds to continue the function?
Religious soup kitchens would probably meet this criteria but would
praying for rain or baptizing dead people? Although Texas Governor Rick
Perry may pray for rain7 and presidential hopeful Mitt Romney may want
past presidents baptized, we think most people would agree that
government has no interest in addressing such “spiritual concerns.”
In summary, religions spend a relatively small portion of their revenue
on physical charity, and while they spend a larger portion of their
revenue addressing spiritual concerns, most of that qualifies as labor,
not charity. What little would qualify as “spiritual charity” would not
be replaced by government if discontinued. In short, religions are, by
and large, not engaged in charitable work.
As a result, we calculated the subsidies to religions under the
assumption that religions are more like for-profit corporations
providing entertainment (such as movie theaters or amusement parks)
rather than charities. That assumption is actually a fairly accurate
description of their primary activity: religions largely provide
entertainment for their “consumers.” And while that entertainment may be
meaningful to their consumers and even address “spiritual concerns,” the
same can be said for movies (well, some movies). So, our starting
assumption in calculating government subsidies to religions was to treat
religious institutions like corporations. We recognize that it is not a
perfectly sound assumption,8 but if you will grant it for now you may
find the resulting calculations of interest.
Figure 1 summarizes the tax code related to religions. On the left are
the sources of revenue for religions, labeled “Monies In.” Religions and
ministers are in the middle. And on the right are the different ways
religions and ministers are subsidized, labeled “Government Subsidies.”
These tax exemptions and tax breaks are an indirect form of “subsidy” in
that the government is not providing direct revenue to religions, with
one exception, but indirectly subsidizing religion. Religious
institutions and functionaries are either not required to pay taxes or
pay reduced taxes, while donations to religions are either tax free or
result in a deduction from taxes. So, while the various governments
involved are generally not transferring money directly to religions
(though the government’s Faith-Based Initiatives do just that), they are
not requiring the institutions, functionaries, or donors to religions to
pay taxes that they would have to pay if they were corporations.
The primary source of revenue to religions is personal donations, but
corporations and trusts can and often do donate as well. According to
Giving USA, religions received $100.95 billion in donations in 2009.9
Religions can also hold fund-raisers to generate revenue, which can
include things such as merchandise given as donations and income from
bingo games. It is not known how much money is raised through these
sources each year. While not necessarily a source of monetary revenue,
religions are also the beneficiaries of volunteer labor, likely to the
tune of billions of hours every year, a benefit for-profit corporations
cannot receive.10 The one direct subsidy to religions in the United
States every year is the money given to religions through the White
House Office of Faith-Based and Community Initiatives. In 2009, that
amount was $2.2 billion, though additional money can be given at the
state level. Finally, religions can also rent their property or engage
in other for-profit activities. Some of these business activities may be
deemed “related” to their primary purpose, and the profits would not be
taxed (such as a daycare for church members’ kids, selling secondhand
clothes and goods received as donations, selling a church-related
periodical, and the like). Other activities that cannot be deemed
“related” to the primary purpose of the religion fall under the
Unrelated Business Income classification of the Internal Revenue Service
(IRS) tax code; religions are required to pay taxes on this income at
the corporate tax rate.12 To what extent religions engage in for-profit
business that is tax-exempt is unclear because such entities are
typically privately held corporations that do not have to report profits
or losses (though see below). In summary, the revenue sources for
religions fall into primarily four groups: (1) donations, (2)
fund-raisers and volunteer labor, (3) direct federal subsidies, and (4)
“related” and “unrelated” business income, the former being tax-exempt
and the latter not.
We now turn to the other side of the figure, where the subsidies to
religion are illustrated. To begin with, religions pay no taxes on
personal or corporate donations or on donations given to them by trusts.
These donations can be of any kind—cash, stocks, property, etc.13
Generally, religions are required to report the total donations
received, but they can also be exempt from doing so. They also are not
required to report the source of donations, though they are supposed to
keep financial records. However, religions are highly unlikely to be
audited because Congress has imposed special limitations on when
churches can be audited.14
What this means is that donations to religions are largely unregulated.
In our discussions while investigating the subsidies to religion, we
realized that religions would be the ideal way to launder money if you
were engaged in an illegal enterprise. Hypothetically, the leader of a
drug cartel could have one of his lieutenants start a church and file
for tax-exempt status.15 Once granted, money from the sale of drugs
could then be donated to the religion, which could use the funds to
build extravagant buildings (including a “parsonage”), host extravagant
“services” (a.k.a. parties) for members of the religion, and pay
extravagant salaries to its ministers (including the leader of the
cartel). Drug money could be laundered through the church’s bank
accounts with little risk of being caught by authorities. If drug
cartels and the Mafia aren’t already doing this, we’d be surprised.
In order to calculate the government subsidy resulting from tax-exempt
donations, we assumed that religions would be taxed at the maximum
federal corporate tax rate, given their revenue (for example, the United
Methodist Church parent organization falls into the highest corporate
tax bracket, as would most local congregations). Using this assumption,
the subsidy to religions in the form of lost corporate tax revenue to
the federal government is about $35.3 billion annually.16 We estimated
that states subsidize religions to the tune of about $6.18 billion per
year as well by not requiring religious institutions to pay income
taxes.17 Given the literally thousands of different local corporate tax
rates, we did not calculate the subsidy to religions from local
governments, but it would likely add hundreds of millions of dollars
more in subsidies.
We were also unable to come up with estimates for the size of the other
three sources of revenue: fund-raisers, volunteer labor, and unrelated
business income. We assume that the fund-raisers and volunteer labor do
not contribute nearly as much to the overall revenue of religions as do
the donations received. Also, religious institutions should be paying
taxes for their Unrelated Business Income and appear to be doing so,
though possibly at reduced rates. For instance, the Mormon Church owns a
billion dollar ranch in central Florida. Careful examination of the
tax record suggests that the Church may be paying just 0.03 percent in
property taxes (i.e., three-hundredths of 1 percent) as compared to
other landowners in Osceola County, who are paying about 1.68 percent.19
If the Church were paying the full rate—1.68 percent—it would pay almost
$16.8 million per year in property taxes for its $1 billion ranch, but
it appears to be paying closer to $300,000 per year. Why the LDS Church
is paying at a reduced rate is unclear. Regardless of whether it pays
the full tax rate or not, it is paying something. But this is just the
property tax; there is no way to know how much money is generated from
the ranch or any other religion-owned for-profit corporation. As a
result, we were unable to calculate these sources of revenue. We can
only guess, then, that we are underestimating the overall subsidy to
religions in the United States, probably by billions.
As if the tax-free incentive to religions were not a sufficient subsidy,
donors to religions get to deduct those donations from their taxable
income when calculating their income taxes.20 Up to 50 percent of one’s
income can be donated and written off.21 However, this is not a direct
subsidy to religions but rather to religious people. It does, however,
result in an even more indirect subsidy to religions because it results
in more donations: people would rather give their money to their
religion than to the government, and they do so when it is financially
beneficial for them.22 Thus, the indirect subsidy to donors actually
increases donations to religions, reducing taxes paid to the government.
Given the complexities in calculating deductions in taxable income and
the fact that most of the subsidy is to religious people and not the
religions, we were unable to arrive at a reliable estimate of the size
of this subsidy to religions.
In addition to paying no tax on donations, religious institutions pay no
property taxes. The Hartford Seminary estimates that there are 335,000
congregations in the United States.23 Using forty-seven churches in
Tampa from six different religions as our basis (Presbyterians, Mormons,
Baptists, Methodists, Episcopalians, and Pentecostals), we estimated
that the average value of a church in the United States today is about
$1.7 million (land and building).24 Because property taxes are paid at
the state level, we averaged the total number of churches across all
fifty states, multiplied the estimated number of churches by the average
value, and then calculated the lost state revenues. States subsidize
religions to the tune of about $26.2 billion per year by not requiring
religious institutions to pay property taxes for property worth about
$600 billion. 25 This subsidy is of particular interest because property
taxes pay for services such as firefighting and police, which religious
institutions use the same as corporations and private citizens.
Religions also pay no investment taxes (such as capital gains taxes).
Most people probably do not realize that many religions have
investments. These can result from surplus cash donations or donations
of investment instruments such as stocks, as noted above. Some
denominations have such large endowments that they have split the
endowment off from the denomination so that it can be managed
independently. A good example is the Presbyterian Foundation, which
manages $1.9 billion in assets.26 Just as with donor income, religions
are supposed to report their investment portfolios or investment
income27 but can be exempt from doing so. And just as with donations to
religions, the IRS does not report on these at any level, making it
difficult to determine the amount religions have invested. We found an
estimate for endowed Presbyterian churches from a book on the finances
of American religion in the mid 1990s.28 They estimated that the total
of Presbyterian endowments in the mid 1990s was $500 million.29 Using
that number, we generated a per-capita endowment for Presbyterians and
then multiplied that by the number of adults in this country who
consider themselves religious. Our best estimates suggest the total
investments held by religions here are somewhere close to $18 billion.
The subsidy to religions from not paying capital gains taxes is rather
small compared to the other subsidies—somewhere around $41 million per
year. 30
We also know that religions, when purchasing goods and supplies, are not
required to pay sales tax in states that collect sales tax. However, we
were unable to arrive at a reliable estimate of how much this subsidy
would be because there is no clear basis for calculating the amount
religions spend on such goods and services.
The situation regarding ministers and employees is a bit more
complicated. Actual employees of religions (janitors, groundskeepers,
and the like) pay taxes like everyone else—both income and Social
Security taxes—and the taxes are typically withheld by the religions and
paid directly to the IRS or state or local governments.31 Thus, there is
no subsidy for religions’ employees. But ministers (pastors, rabbis,
priests, and so on) are typically not considered religious employees.
Often they are categorized as subcontractors and are required to pay
their own taxes.32 They are taxed, for the most part, at the same rate
as everyone else in the United States who is self-employed, with two
exceptions.
First, religious functionaries are the only group that can opt out of
SECA, the tax that funds Social Security.33 Doing so means they do not
have to pay SECA taxes, but they also do not receive any benefits from
Social Security. It is unknown how many religious functionaries have
done this, so we cannot estimate any subsidy to religions on this front,
but it is unlikely to be large because there is also a penalty in the
form of not receiving Social Security benefits.
The second difference between ministers and other taxpayers is what is
referred to as the “parsonage exemption.” Ministers are allowed to
deduct the cost of their living arrangements from their taxable income
(e.g., mortgage or rent, utilities, furnishings, upkeep, etc.).34 This
can range from a relatively small deduction up to those claimed by
people like Rick Warren and our very own Randy White, who have claimed
deductions in the tens of thousands.35 Parsonage exemptions work like
donations to religions for the donors in that the exemption reduces the
amount of income against which taxes are paid. The Hartford Seminary
estimates that the total number of ministers in this country is about
600,000.36 If you take an average salary for those individuals of
$85,00037 and assume an average parsonage exemption of $8,000, you
arrive at a subsidy of about $1.2 billion for the living arrangements of
ministers in America every year.
To summarize: religious institutions receive revenue through personal
and corporate donations, fund-raisers, volunteer labor, direct
subsidies, and corporate profits. Donations result in tax deductions for
those making the donations. Religions do not pay income, property,
investment, or sales tax. Ministers can opt out of SECA and receive a
parsonage exemption. We estimated the subsidies from the federal and
state governments in not charging religions the equivalent of corporate
income tax but were unable to come up with an accurate estimate of the
subsidy from local governments. We also did not estimate the subsidy to
donors through tax deductions. We estimated the subsidy to religions
from not paying investment or property taxes but not the subsidy from
not paying sales taxes. We estimated the subsidy from the parsonage
exemption but not from the SECA exemption. And we included the direct
subsidy to religions from the Office of Faith-Based Initiatives.
Our
calculations are summarized in Table 1. Given our inability to estimate
some of the subsidies, we are fairly confident that our estimates are on
the conservative end of the subsidies provided to religions by
governments in the United States.
To put this into perspective, the combined total of government subsidies
to agriculture in the United States in 2009 was estimated to be $180.8
billion.38 Religions receive at least 40 percent of the subsidy that
agriculture does in the United States. Another way to illustrate the
size of the subsidy may be to illustrate how much tax revenue would
increase at the state level if religious institutions had to pay
property taxes. In Florida, where the state government’s budget was
$69.1 billion in 2011, the amount of tax revenue lost from subsidizing
religious property was $2.2 billion or 3 percent of the state budget.
The additional revenue would have mostly prevented the $1.1 billion cut
to firefighter and police retirement plans and the $1.3 billion cut to
public schools.39
One of the initial thoughts we had as we discovered the size of the
subsidy to religions in the United States was that this may help explain
why religion has remained so prominent in comparison to other developed
countries such as those in Western Europe. However, this argument seems
problematic in light of the fact that many countries in Western Europe
have state churches that are literally funded by the government. Some
have argued that the state-funding of churches in Western Europe may
have actually contributed to their decline as it led to “lazy
monopolies” and “lazy” ministers who did not have to work hard to
attract adherents in order to make money.40 While that argument may have
some merit, our findings are not directly comparable, as the funding
systems are different. In most of the Western European countries with
state churches, the subsidy is to one religion, not to all religions,
which is the case in the United States. Thus, governments here actually
subsidize all religion, which has the effect of maintaining a level of
competition between denominations that contributes to the greater vigor
observed among U.S. churches. This is a different dynamic and may have
different practical consequences, such as keeping dying religions alive.
For instance, one of the authors of this article recently visited a
Presbyterian church near his home in Florida. In a church built to hold
over 250 members, just under thirty showed up for the Sunday service,
and all but a handful were over fifty years old. In many respects, this
church mirrors the empty and dying churches in Western Europe. In a
discussion with one of the members of the church after the service, the
issue of finances came up. It was put to this congregant that, unless
there were some still-active members with deep pockets, it seemed
unlikely that a congregation of twenty-five to thirty active members
would be able to maintain a church of that size. He admitted that that
was true but noted that the church had sufficient reserves to survive
for at least a few more years before that would become a serious
concern. If, on top of utility and upkeep expenses, the congregation had
to pay property taxes on their $1 million church, income taxes on their
donations, capital gains taxes on their investments, and could not write
off their donations or volunteer labor, it is likely the church would
have already folded. Thus, the subsidies to religions in the United
States today may not be encouraging the growth of religions, but they
may be keeping alive on the equivalent of subsidized life-support many
religions that should be dead.
If these subsidies were removed—though we have no basis for believing
that they will be anytime soon—we wonder what the damage to religion
would be. There is evidence that donations to religions are tied to
taxes; as the tax benefit of donating goes up, so do donations and vice
versa.41 In other words, it seems likely that the removal of these
subsidies would result in a substantial decrease in the supply of
religion in the United States. To what extent it would affect demand for
religion is uncertain.
For those individuals who argue that religions should receive subsidies
because of their charitable work, there is an easy solution for that
problem. If religions want to engage in charitable work, they should
separate religious activities and finances from their charitable
activities and finances. The charities run by religions could be
tax-exempt, but the religious organizations would be treated like civic
leagues or sports clubs or any other volunteer organization that exists
for entertainment or the benefit of its members. Those groups are not
tax-exempt and are not subsidized by the government.
What, then, can we conclude from these findings? First, we have avoided
any discussion of the separation between church and state and the
establishment of religion because these subsidies do fall under the
protection of the First Amendment—they do not favor any one particular
religion. They do, of course, favor religion over nonreligion, but, as
noted above, we do not foresee the ending of these subsidies anytime
soon. Second, it seems likely that subsidies are propping up religion in
the United States, though to what extent is not clear. Certainly many
religions that are near failing would have done so already if not for
the subsidies they receive from the government. Another practical result
of these subsidies is that religions are more affluent and more
influential than they would otherwise be, because they have the
resources to fund efforts to change legislation, create widely consumed
media, and influence public policy.
There is also the question of whether the monies lost through these
subsidies—assuming they could be collected by ending the subsidies—could
be better spent, particularly by governments. We are ambivalent on that
point, but we do agree with Barb Dempsey, the mayor of Mount Clemens,
Michigan, who argued that religions should at least pay their fair share
for services like fire protection, streetlights, police, and roads.42
They use those services just like other organizations do.
Finally, as the perceived “benefit” to society of religions becomes
increasingly irrelevant as more and more Americans cease to utilize
their “services” by disaffiliating, it will also be increasingly unfair
for a large percentage of nonreligious Americans (almost 40 percent in
some states) to subsidize the recreational activities of others. These
subsidies should be phased out. But since that is unlikely to happen,
we’d accept the following alternative: the ability to write off our
annual entertainment expenses as “donations”; the subsidizing of all of
our housing expenses, including utilities and maintenance costs; being
exempt from paying taxes on businesses we start related to our primary
purpose in life (say, a micro-brewery); direct cash transfers to us from
the government for trying to convert people to our worldviews while
claiming to provide social services; and, most important, the right to
host games of bingo without reporting our income as gambling revenue!
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