Relatively little fanfare accompanied U.S. District Judge Barbara Crabb’s ruling in October that a tax exemption for clergy housing dating back to 1954 violates the First Amendment. Crabb confirmed her ruling in the case Gaylor v. Mnuchin this past Wednesday, declaring unconstitutional a provision of the tax code that’s made it possible for clergy to enjoy higher standards of living than their salaries might suggest.
At issue is section 107 of the U.S. Tax Code, which contains two subsections pertaining to “the case of a minister of the gospel.” (The term was originally intended to refer only to ordained Christian clergy, but its meaning was later expanded by the Internal Revenue Service to include their counterparts in other religious traditions.) The first subsection, 107(1), allows a minister to exclude from taxable income the value of a living space that’s considered “part of his compensation,” while the second, 107(2), permits the exclusion of “the rental allowance paid to him” for a living space. This second subsection, wherein the employer provides the money rather than the space itself, is the one that Crabb found unconstitutional.
For decades, both Catholic and Protestant clergy in the U.S. tended to fall into the former of these categories, and indeed, many religious workers still do. Catholic priests typically live in rectories provided by the church; monks and nuns, Christian and otherwise, live in monasteries and convents; and a number of historic Protestant churches, especially those best endowed financially, provide parsonages.
But over time, an increasing number of clergy have made their own living arrangements. Churches found parsonages prohibitively expensive; congregants preferred to see their donations go toward services rather than clergy housing; and new religious ventures, especially the nondenominational and evangelical churches that began to flourish in the second half of the twentieth century, could not boast the historic endowments of their mainline counterparts.
So in 1954, Congress enacted the provision of the tax code at stake in Gaylor v. Mnuchin. A House committee said that the aim of the new subsection was to treat equally those ministers for whom churches provided housing and those who were paid housing allowances instead. The sponsor of the legislation, Illinois Democratic Rep. Peter Mack, justified the law in terms resonant of the fight against communism:
Certainly, in these times when we are being threatened by a godless and anti-religious world movement we should correct this discrimination against certain ministers of the gospel who are carrying on such a courageous fight against this. Certainly this is not too much to do for these people who are caring for our spiritual welfare.
In the very same year Congress added the words “under God” to the Pledge of Allegiance, and in 1956, it mandated that “In God We Trust” appear on U.S. currency.
Neither required by free exercise, nor prohibited by establishment
In the suit brought by the Freedom from Religion Foundation and several of its leaders, Judge Crabb ruled that the housing allowance exemption violates the First Amendment’s prohibition against the establishment of religion. Crabb had reached an identical conclusion at an earlier stage of the litigation, in 2013, but she was overruled on procedural grounds by the Seventh Circuit Court of Appeals. Crabb based her decision on the constitutional test that the Supreme Court had articulated in Lemon v. Kurtzman (1971), which requires that a law be invalidated if it does not have a secular purpose, has the primary effect of advancing or inhibiting religion, or fosters excessive entanglement between government and religious institutions.
Rejecting arguments by both the Obama and Trump administrations (the litigation spanned the presidential transition, and the incoming administration maintained the position of its predecessor), Crabb concluded that the housing allowance exemption fails the Lemon test. The exemption for church-provided housing, which excludes from taxation the cost of housing provided directly by a religious employer, has secular analogues and can be construed as falling within the longstanding tax exemptions for housing provided for the “convenience of the employer.” But the housing allowance rule, Crabb held, serves no secular purpose and in fact gives preferential treatment to ministers in comparison to their non-religious counterparts.
“I do not doubt that many ministers are paid significantly less than what their commitment and skill level would suggest. This is an unfortunate truth that applies to many devoted and talented employees in service professions,” Crabb wrote. “However, the manner in which Congress alleviated a financial burden on a group of religious persons was neither required by the free exercise clause nor prohibited by the establishment clause.” She suggested that there are a variety of ways in which Congress could constitutionally support ministers’ housing needs: by creating an exemption for all taxpayers whose nonprofit employers require them to live near work, for instance. But an exemption available to some religious employees, and no one else, cannot pass constitutional muster.
So, what happens next? Crabb’s order of December 13 declared the housing allowance exemption unconstitutional, but the judge stayed her own ruling pending appeal. It’s likely that the case will eventually find its way to the Supreme Court.
In retrospect, it’s surprising that the housing allowance rule has lasted as long as it has. The provision carves out a significant benefit that applies to clergy and no one else—to the tune of some $700 to $800 million in lost tax revenue annually, according to one nonpartisan analysis. Crabb’s conclusion that this exemption violates the Establishment Clause is legally not farfetched. While there’s room to debate whether providing a tax exemption is identical to subsidizing religion directly, it’s hard to avoid reaching the conclusion that an exemption available only to clergy favors religious employees over secular ones. But like “under God” and “in God we trust,” the special status of clergy in American society has gone unquestioned for many years.
If Crabb’s ruling is sustained on appeal, it will substantially impact both ministers and their congregations. A minister with a $2,000 mortgage and $500 in additional monthly housing expenses can currently exclude $30,000 of income from taxation annually. The elimination of the housing allowance exclusion would likely increase her tax liability by some $6,600 to $7,200 under the bill about to be voted on by Congress. Ministers who live in regions where both housing costs and state and local taxes are high are likely already to be hurt by the tax bill; some will surely feel that the elimination of the exclusion for their housing allowance would only add insult to injury. (And some ministers, of course, take advantage of the tax code to exclude many tens of thousands of dollars from taxation.)
For congregations that do not provide housing to their clergy, the elimination of subsection 107(2) will have a more indirect, but still considerable, effect. Those churches with the financial resources to do so may prefer to provide their ministers with housing directly, since Crabb’s ruling leaves subsection 107(1) intact. But that’s an option that less well-endowed congregations, which already struggle to meet the financial needs of ministers and their families, will almost certainly find unfeasible. Will lay leaders shrug their shoulders and remind their ministers that the only certainties in life are death and taxes? Or will they find the resources to “top up” ministers’ salaries? In any case, if your local priest or minister seems unusually blue this Christmas, they may well have good reason why.
