The Impact of Tax Reform on Churches and Ministries

| November 14, 2017

U.S. Supreme Court Justice Oliver Wendell Holmes famously said that “taxes are what we pay for a civilized society”; and those words are engraved on the front of the Internal Revenue Service building in Washington, D.C. That may be, but they are also an endless source of controversy and dispute.

On November 2, 2017, the Republican Caucus in the House of Representatives released its proposal for sweeping tax reform. The bill would be the largest overhaul of the Internal Revenue Code since 1986. Most of the media attention is directed to the debate over the reduction in corporate tax rates, the simplification of the tax brackets, the elimination or limitation of itemized deductions (such as state and local taxes) and the $1.5 trillion of new debt.

But within the 427 pages of the proposed tax bill are two provisions that could greatly impact churches and non-profit ministries: one financial and the other political. Both deserve the careful attention of the Congress and of the public during this debate.

The first great impact would be financial. Most non-profits are public charities, meaning that they depend upon donations to fund their operations (as opposed to private foundations that have large endowments). These donations are encouraged in the tax code by making them tax deductible. The writers of the proposed tax reform promised not to change or limit Section 170 that allows charitable deductions, and they did not.

Rather, the new reform doubles the standard deduction, to $11,000 for individuals and $22,000 for married couples, meaning that everyone gets the full standard deduction regardless of whether they itemize. If this change survives to become law (together with other provisions that limit available deductions), then only 5% of American taxpayers will itemize deductions.

Since charitable contributions are an itemized deduction, there will be no tax benefit in making charitable contributions for 95% of taxpayers.

This change, combined with a reduction in tax rates, will reduce the economic incentive to make charitable donations, and thereby reduce what is actually contributed. Certainly, the primary reason that people give is a commitment to support ministries and charities. A strong argument can be made that government should not be subsiding charitable and religious work by providing tax incentives to give.

But this being said, clearly to some extent, the amount being given is enhanced by the understanding that the gift will reduce the giver’s tax burden. A study by the Indiana University Lilly Family School of Philanthropy found that expanding the standard deduction and decreasing the top marginal tax rate — as the proposed legislation does — could decrease giving between $4.9 billion and $13.1 billion annually, which means essentially a 5% reduction in donations to churches and ministries.

The second impact of the tax reform bill would be political, for it includes a repeal of the so-called Johnson Amendment limiting what churches can say concerning candidates for political office.

Under the Johnson Amendment, a non-profit organization cannot endorse or oppose a candidate. It can take positions on political issues, but cannot expressly endorse or oppose a candidate for public office. This has long been a point of contention, as to whether it restricts the free speech of pastors and preachers.

The tax reform bill looks to carve out an exception to the Johnson Amendment:

“…An organization … shall not fail to be treated as organized and operated exclusively for a religious purpose, nor shall it be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) any candidate for public office, solely because of the content of any homily, sermon, teaching, dialectic, or other presentation made during religious services or gatherings, but only if the preparation and presentation of such content—

(A) is in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose, and

(B) results in the organization incurring not more than de minimis incremental expenses.’’

In other words, an entity “organized and operated exclusively for a religious purpose” (meaning a church) will not jeopardize its tax-exempt status because of a statement made during its regular and customary religious service and which is not separately advertised or distributed.

This change in the law is strongly supported by some, but seems to be generally unpopular among the American people. A July, 2017 poll from the Public Policy Research Institute found that 71% of Americans oppose allowing churches and places of public worship to endorse political candidates while maintaining their tax exempt status. This majority seems to include all major religious groups, although with a smaller majority among white evangelical Christians (56% in favor of maintaining the restriction). The primary concern seems to be that churches could be actively courted by political parties to become sounding boards for their candidates and a tax-exempt way of reaching parts of the electorate.

There is a long way to go in the tax reform debate, and these questions are certainly minor points of the much larger (and very important) legislation. There will be changes and turns as the bill progresses through Congress; and the law of unintended consequences makes the ultimate impact very uncertain.

Nevertheless, these changes could have a profound impact on the future ministry and funding of churches and non-profits, and are worthy of great care, deliberation, and public comment as the process moves forward.

Taxes may indeed be the cost of a civilized society, but in the words of President Lyndon Johnson “in 1790, the Nation which had fought a revolution against taxation without representation discovered that some of its citizens weren’t much happier about taxation with representation.”


Category: Law

About the Author ()

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Email | Website | Thomas Schetelich is a founding principal in the law firm of Ferguson, Schetelich & Ballew in Baltimore, Maryland, and a member of the United States Supreme Court Bar. He heads both the firm’s corporate/ business law practice and its personal legal services department. He is an AV rated attorney awarded for highest standards of professional skill and ethical practice. Mr. Schetelich devotes much of his practice to assisting charitable and religious organizations, and is the President of The Christian Professional Network. He is a frequent speaker on Biblical and legal matters throughout the United States.