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Dec 04 2013

The Other Side of the Parsonage Tax Exemption

Peter Reilly, a CPA and tax policy expert, makes a very good point in discussing the Freedom From Religion Foundation’s so-far successful lawsuit against the parsonage tax exemption. It turns out that while this benefit helps ministers a lot, there are other provisions in the tax code that hurt them enormously and without justification.

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This is a compelling argument. Just as there is no constitutional justification for giving a parsonage allowance to the leader of a religious non-profit but not to leaders of non-religious non-profits, lowering the tax rate of the former and raising the tax rate of the latter, there’s also no justification for allowing leaders of non-religious non-profits to be W-2 employees but not leaders of religious non-profits, thus raising the taxes of the latter and lowering the taxes of the former. We should be consistent about this.

Reilly wants Congress to pass a law simplifying all of this, either getting rid of the parsonage allowance or extending it to all non-profits and eliminating the requirement that ministers are considered self-employed. I would add to this idea that there should be a cap on the parsonage allowance so that it covers the cost of a modest home but not a multi-million dollar mansion.

15 comments

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  1. 1
    Crimson Clupeidae

    I’m okay with the laws simply making a level playing field. I don’t get why the tax laws for those things are such a mix and match. There are a lot of people in my industry who are ‘self-employed’ and pay the FICA ‘penalty’ (I did myself for quite a few years) and had to do my taxes quarterly, etc.

    I would probably place the blame where it belongs: on the church organization. The actual church (like a business, natch) has the ability to actually hire the pastor and treat them as an employee if they desire, but then they would have to pay their half of FICA. If the pastor owns the church (not sure how that all works), then he is like any other business owner and can incorporate (under 501(c)(3) even) or be treated as a sole proprietor and pay the double tax. It’s their choice.

  2. 2
    Chiroptera

    All ministers are considered self-employed? I’m curious as to what the reason for this would be. Very, very few churches in the US are businesses run by the minister; most churches are either part of a larger corporate organization which places and transfers its ministers around or are independent entities owned and run by the congregation who then hires and fires their pastor a will; in either case, the majority of ministers in this country (at least the ones whose day job is being a minister) are employees of an organization.

  3. 3
    heddle

    Yep, our pastor a) gets a housing tax break and b) is “self employed.” Both forms of special treatment should be abolished.

  4. 4
    Dr X

    Here’s another inconsistency in treatment of ministers. Some time ago, the Catholic Church switched priests to self-employed status because of the statute. Yet by every standard that distinguishes contractors from employees, priests are employees. In fact, the IRS has cracked down on the misclassification of employees as contractors.

    http://blog.intuit.com/employees/is-your-independent-contractor-really-an-employee/

  5. 5
    wscott

    Those that are required to live in church housing…

    Reily makes some good points. But here he’s basically turned “get free housing” into some sort of burdensome requirement?
    .
    True story: because I’m on call 24/7 for my job, I’m required to drive a company vehicle. (I’m not complaining.) The IRS considers this income and I have to pay taxes on it. And I can’t really argue with that. Why should Parson Brown’s “required” free housing be treated any different?

  6. 6
    DaveL

    Yet another good reason to have one uniform standard for non-profits, whether religious or not.

  7. 7
    democommie

    The simple way for any church to deal with the minister paying double FICA (something I did for years) is to simply compensate him so that the 15+% is not hurting him any worse than the 1/2 rate would affect him. It ain’t rocket science.

    Back when I still went to church I used to give them some money from time to time. I could never deduct a dime of it. If you really want to do something good for somebody else, getting compensated is not necessary. If you just want the tax break there’s a lot of other stuff you can do instead of giving money to religious institutions.

  8. 8
    David C Brayton

    Every tax ‘break’ creates a ‘burden’ somewhere else. Why should single people be penalized for not getting married? Marriage is, after all, subsidized by the joint filing system. Why should folks that haven’t yet had children (or decide not to have children) subsidize child rearing with the deduction for dependents? Why should drivers of cars subsidize the use roads by cyclists? Shouldn’t cyclists hafta register their bikes every year? After all, they too use the roads.

    The outrage that some folks express because corporations don’t pay any taxes is rather silly. Once a government starts to encourage certain activities by offering tax breaks, no one should complain that folks start structuring their finances to take advantage of the tax break.

    Just because certain folks do a lot of the incentized activity resulting in large tax benefits, doesn’t mean their effective tax rate is unfair. Hardly. After all, the tax payer did the activity that was incentivized by the tax break. And if the government or body politic doesn’t like it, it can simply change the law.

    Taxes are the ultimate tool of social engineering because folks respond really, really well to financial incentives.

    But taxes are also just like a coin–they always have two faces, a positive and a negative.

  9. 9
    David C Brayton

    @democommie–Precisely. That is one reason why independent contractors are compensated at a higher rate than employees, because they have a higher tax burden. But, to the business and the tax collector, it’s a wash.

  10. 10
    democommie

    @8:

    Your premise would be tenable if the tax code wasn’t written in such a way that the poor and middle class bear the burden for much of the cost of society’s and governments expenditures.

    In 1986 the tax code was changed to allow interest for mortgages to be deducted but to disallow deductions for interest on credit card debt. That single change cost me a lot of money. People buying homes got a deal at the expense of renters who had credit card debt.

    Corporatists decry tax increases as being “job killers” (among other things) but nobody seems to notice the millions of people in permanent states of indebtedness (economic servitude, actually) as a result of predatory lending practices.

    The tax code is rigged for the rich.

  11. 11
    jaybee

    Here’s another double standard — Catholic priests don’t get to pass on their inheritance to their children.

    More seriously, Dave Brayton, I couldn’t tell if you believe the examples you are giving, but certainly many people do make the asinine claim,

    Why should drivers of cars subsidize the use roads by cyclists?

    I do about 3000 miles a year on a road bike. I also drive a car most places, and pay taxes just like everyone else. If I stopped riding my bike, the taxes I pay for road maintenance wouldn’t go up or down a penny. And in the second place, if we assessed taxes by the amount of damage a given car makes (which we do in terms of taxing gas by the gallon, and having toll fees greater for 18 wheelers than family cars), I’d imagine I’d pay about $1.00 in road use tax for all the damage my bike does.

  12. 12
    pamsmigh

    Don’t lose too much sleep over this. Many churches give the pastor the 7.65 to pay to the IRS as part of their salary. Yes, I know that leaves a tiny bit uncovered, but it’s not as if it’s the full 7.65.

  13. 13
    hatchetfish when it's not at home

    The best science I’ve seen on road damage caused by different vehicles found it correlates to the 5th (5th!) power of weight. Bikes effectively cause no damage whatsoever, even compared to the lightest of cars.

  14. 14
    khms

    Of course, damage is only one point. What we really ought to look at is the cost to provide those roads.

    The incremental cost to allow for bikes in addition to cars is typically low. However, if you build dedicates bike lanes (and some dedicated bike roads without support for cars), and repair them when the winter damages them, and clean them from snow or leaves, then obviously there are costs – not as high as for cars, but still there. And where I live, they do that. And when I was younger, I profited from that. (These days, I sometimes take the bus, but mostly I walk … of course, the exact same argument works for pedestrians.) However, there are no specific taxes for bikes or pedestrians.

    I think the more important argument is that the bureaucracy needed probably wouldn’t pay for itself (there’d probably be all sorts of exemptions, making for lots of red tape), and that especially when you look at pedestrians, it would hit pretty much everyone anyway … easier to pay for this out of the general pot.

  15. 15
    David C Brayton

    The point I was trying to make was that there are ALWAYS winners and losers with tax policy. I don’t particularly care one way or another on any of the issues.

    democommie argues that the tax system is flawed because it favors the rich. While that might be true, it really is an argument against the way our democracy is structured. If you don’t like the tax code, vote for someone that wants to change it. But it’s hard to find candidates that want to change the the tax code. Campaigns are damn expense and the money to finance them comes from people with money. And it’s not like rich contributors are going to donate to candidates that want to raise their taxes.

    jaybee is right. I ride about 3000 miles a year too. And I own a car and pay gas taxes, registration and regular ole’ income tax to support our transportation system. The taxes I pay are more than adequate to pay for damage caused by bike riding (but regular maintenance is a different story).

    At the end of the day, the funds hafta come from somewhere. If the politicians decide that all funding for roads should come from payroll taxes or taxes on cigarettes, instead registration/gas taxes, so be it. It is a wash at the end of the day.

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