Parsonage allowances, parsimony, and privilege

church moneyLate last night, I saw a news story pop up in my Facebook feed, thanks to some upper-midwestern church types. It seems that a federal judge has found the IRS provision which allows clergy to avoid income taxes on their housing to be unconstitutional. Now The Lead has picked up the story, and there’s a fair amount of conversation amongst clergy on the internets.

For those who aren’t familiar, ministers receive a tax benefit that is unique to ministers and members of religious orders. We are able to declare a portion of our cash income or the value of provided housing as a “parsonage allowance,” and thus avoid income taxes on that amount. We’re still required to pay social security tax on all income, both the stipend and the housing allowance. This ruling, if upheld and implemented in tax practice, would significantly increase the income tax liability of most ministers.

Let’s dive into the news report.

[Judge Barbara] Crabb acknowledged in her decision that the exemption is a boon to ministers, referencing a 2002 statement by then-U.S. Rep. Jim Ramstad of Minnesota that the tax exemption would save clergy members $2.3 billion in taxes from 2002-2007. But she said the magnitude of the benefit only underscores what’s wrong with the law. The exemption “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise,” Crabb wrote.

So there are a few things worth noting here. First, the ruling may be overturned or Congress may take legislative action to preserve this benefit. So those of us who would be affected need to pay attention now, but it’s premature to hit the panic button. [UPDATE: On Twitter, I see that this ruling applies to housing allowances only, not to supplied housing. Same points apply, I think.]

Second, if it stands, this will be an expensive decision for many ministers and their congregations. Take a minister who is paid $40,000 by a congregation and who receives a housing allowance of $1,000 per month. That person would now owe income tax on $52,000 instead of $40,000. That will cost a few thousand bucks, and my example is a pretty modest one. So, effectively, clergy income will go down unless their congregation increases compensation as an offset. In other words, this would be received as a new cost to a congregation or a minister.

Third, I would expect clergy to be unhappy with this change at first. After all, it could cost most of us some real money. I would certainly be affected. Already, I’ve seen some (understandable) anger. “Why go after us, and not corporate tax loopholes?” We do need to close corporate tax loopholes (or, really, tax canyons). In my opinion, the wealthy need to be taxed at a higher rate than they are at present. But that’s mostly unrelated to what’s happening here. See next point.

Fourth, for decades, ministers have enjoyed this tax benefit as the remnant of WASPy American privilege. Only ministers and members of religious orders receive this benefit. The language itself is instructive, as one reads IRS publications talking about “ministers of the gospel.” So even an imam or rabbi who claims this benefit is, in the eyes of the IRS, a “minister of the gospel.” Other non-profit leaders, even those who must live in provided housing, do not receive this benefit. In our nation, protected by the Establishment Clause, does it make sense for the government to subsidize the exercise of religion? And if that does make sense, should we be using Christian language to do it?

Churches receive other benefits from their status as non-profit organizations. In most places, church property is not subject to property tax. The operating income of most religious organizations is not subject to tax, and gifts to churches are usually tax deductible for the donor. So it’s not as if churches aren’t receiving benefits correlative with their contribution to the good of society. But the parsonage allowance has been a benefit accorded only to religious organizations, so it’s a bit of a different animal.

Fifth, if we clergy and others want to argue on behalf of this benefit, we’ll need to have a much better reason than “I like it.” The reason we come up with will need to withstand scrutiny from those who will trot out the Establishment Clause. The reason would need to say why clergy should receive the benefit and not the employees of other non-profit organizations, or one would need to argue that the employees of all non-profits should receive the benefit; that seems like an uphill battle. I cannot think of a justification for this benefit today, though I will certainly continue to claim it as long as it is available.

Sixth, this will increase the stress on already stressed congregations and clergy. The vast majority of Episcopal congregations, to name one denominational example, are in financial distress. Adding a new cost of several thousand dollars to preserve the income level of their clergy will seem unbearable. Likewise, clergy will are underpaid or who perceive they are underpaid will find the lack of this benefit intolerable. Hard news, friends: the financial stress on most of our congregations is only going to get worse in coming years. There is no denying it, just delaying it. Until we rethink how our congregations work, we’re looking at bleak financial news and eventual closure. I’ve written before about any number of ways this can change (lose the buildings, increase discipleship and stewardship, or stop expecting full-time professional clergy, among others).

Finally, it would be easy to make this burden vanish. Take an average pastoral sized congregation. They probably have 100 pledging families and their pastor’s tax burden is about to go up by, say, $5,000. Divide that $5,000 by 100 units, and the burden is only $50 per family. For our part, many of us clergy could shoulder more of a tax burden, just as those we serve do in their lives.

The ruling in Wisconsin opens possibilities for rich conversations about the place of the church in civic life, about our tax system, and about church finances. I hope we will move beyond knee-jerk reactions and engage in substantive conversations. We owe this to ourselves, our church, and our society.

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12 Responses

  1. Heidi Shott says:

    I’ve wondered about this for a long time. As a layperson who has worked for 15 years on a diocesan staff, and who discerned (just me and God) that I didn’t need to be ordained to use my gifts for a career in the Episcopal Church, the housing exemption has always smarted a bit. As the Canon for Communication and Advocacy in my diocese, I will do what I need to do to support our congregations, but, personally, the decision makes sense.

  2. Scott, good comments. But it is important to realize that his benefit is not unique. In this specific section of the code it is about “ministers of the Gospel” which as you say has been read very broadly — even including secular humanist atheists! But the principle is also applied to employees whose housing forms a part of their job — most particularly the military.

    Moreover, in many cases the problem would not be as easily soluble as you suggest. If the fair market value of rental of the rectory has to be considered, many clergy would find themselves not just with an extra $1,000 a month income, but perhaps $5,000 a month. That’s no exaggeration for Manhattan. As it is clergy do pay into SS for the equivalent of housing, but SS contributions are capped.

    The same problem would appear in the case of the proposal for churches to pay property tax. (It was the rector of my parish at the turn of the last century who got the ball rolling on that in NY, Deo gratias!). My church property is assessed at over $5 million. I don’t even want to think what the property tax on that would be at equitable levels — but it would certainly break the bank.

    So all things considered, I hope this ruling is either overturned, or the problem fixed.

  3. Herschel Atkinson says:

    Congress has spoken; it is a law. Now it is up to the courts. A similar but more limited benefit applies to military personnel; Basic Housing Allowance or value of housing furnished is not subject to income tax or (as far as I know–it’s been a longtime) to FICA. A bit of schadenfreude contemplating Chairman of JCS paying taxes on fair rental value of Quarters No 1 on Fort Meyer, VA.

  4. Rodney Hudgen says:

    Losing the housing allowance exemption does not both nearly so much as having to pay self employment taxes on top of employment taxes. You can’t have it both ways, and you can’t take me twice. Over the years, one of the reason I heard not to balk at the self employment tax was the housing allowance exemption. I have no idea the connection between the two, if in fact there is one. I do know that my city is coming after churches who allow outside groups to use their space if there are any monies received for that use. They want us to purchase a business license which then opens us up to property taxes. We got a citation for a wedding and reception on premises for which we collect fees to cover our costs.

  5. Scott Gunn says:

    Tobias, thanks for stopping by. I agree that my $1,000 per month example doesn’t work in NYC. However, you are in the 1%. With a median Sunday ASA under 70, the Episcopal Church is mostly small congregations. Most of those are in small towns and less expensive urban areas. I don’t doubt this will be a bigger deal for some clergy and congregations than for others. For this post, I was aiming at the middle of the bell curve.

    I had forgotten that military folk also receive a housing benefit (and others), though their case is vastly different. So perhaps the housing allowance is not wholly unique. Still my point about WASPy privilege stands.

    While I cannot think of a reason beyond self interest for preserving the clergy housing allowance benefit, I do think the tax benefits for churches which other non-profits share make good sense. They can be seen to go hand-in-hand with benefits to wider society, it seems to me. I can’t see the property tax benefit being touched by this ruling.

  6. June Paul says:

    Scott –
    I am looking at your words ‘WASPy’ privilege. And am confused. If WASPy means White Anglo Saxon Protestant then I protest your use of if it here as there are many Persons of Color who are clergy and receive the same tax benefit as the whites.

    Housing and Benefits create such a rift in small town small churches of low income. I have heard conversations from so many lay persons who have no benefits that complain about clergy who do. These same people also complain about State and Federal employees who have benefits and tax deductions etc. . .

    There are so many variables to be considered in all of this it is truly beyond my ability to say what I think is fair and just – – – some congregations do in kind things for payment – some use housing, some use cars, some use retirement accounts.

    But I would like you to explain this WASPy privilege you are mention.

  7. Susan Snook says:

    Scott, here’s a pretty good defense of clergy receiving the housing allowance benefit:

    http://www.forbes.com/sites/peterjreilly/2012/09/06/in-defense-of-special-tax-treatment-for-clergy/

    The idea is that, like military officers, many clergy are required to live where they do “for the convenience of the employer.”

    Personally, I would be happy to give up my housing allowance exemption if they would do away with the rule that we are considered self-employed for FICA/SECA purposes. Paying that extra 7.65% bites. I’ve always looked at the housing allowance as compensating for that extra tax self-employment tax I have to pay. I cannot think of (or find) a good reason why we would be considered self-employed for tax purposes. For common-law purposes, we are certainly employees.

  8. Tobias Haller says:

    Scott, good points, but I think your one percent figure is way under. First, remember, this is not just about Episcopalians. In many smaller towns of my experience, some of the most substantial properties are the churches with their manses, rectories, or parsonages. A fair market test will take no account of the fact that the buildings are from the glory days of the last or earlier century, and rental value would be fixed accordingly.

    That being said, I understand the ruling does not affect the situation of church provided housing, but only a cash housing allowance. That will cut down the applicability of the problem for working clergy who live in rectories, but it will mightily hurt retired Episcopal clergy, whose pension up till now has been attribuable to a housing allowance, and hence sheltered from a tax burden. So I don’t think this is just a matter of the privileged few, but will affect many who are living on limted or small incomes.

  9. Josh says:

    Thanks, would be interesting to have the income go up then of course the pension to also go up. Reminds me of the issues of health insurance parity in the Episcopal Church.

  10. Rev John Price says:

    To be realistic,most clergy live at a subsistence level and the tax break was an enormous help to me when I was just starting out. This benefit also extends to military officers, job supervisors who have to live near a job site as they move from town to town, and many others like that.

  11. Daniel Stroud says:

    As has not been pointed out here, clergy are the only group that are employees-but-not-really-employees for SECA. Eliminating this housing tax break on clergy will actually ensure that clergy have to pays higher burden than a non-ordained person with their same income level due to that little bit of tax code. While it is a weird thing, and is legally difficult to justify, from a fairness perspective it works, because for most clergy it jus came out as a wash. I would be getting a lot less pissy about this if that other unique (and also establishment clause violating?) bit of code were also brought down, but I get the feeling that for all their talk of “fairness” the freedom from religion foundation isn’t going to be sueing the gov over that bit of tax law that screws the clergy.

  12. Norm Morford says:

    Perhaps the provision dated from the days when clergy had no offices in church buildings and usually met with folks about baptisms, marriages, funerals, etc., and counseling in their own homes. Actually, my father who was a Methodist minister did so, even though there was a church office — it seemed the office was mostly for record keeping, preparing a newsletter, etc.