Friday, November 30, 2012

A $71 Billion Tax Break for Churches? Don't Think So

Last summer, several newspapers, blogs, etc. picked up on this article written by Dr. Ryan T. Cragun and two of his students, estimating that tax breaks for churches and other religious organizations cost government $71 billion per year, and like many other crazy things on the web, this doesn't seem to want to go away.

Simply put, the $71 billion number has some very serious problems.

Dr. Cragun gets $35 billion of his $71 billion number by taking the estimated donations to churches from a 2009 survey by Giving USA of $100 billion, and applying the 35% corporate tax rate to that.  But anyone with even a smidgen of knowledge about tax law knows this isn't the way it works.  We don't have a tax on GROSS INCOME; rather, the tax is on net income.

If churches were treated as taxpaying businesses, then they also would get to deduct their operating expenses and depreciation from their gross revenue in order to reach a taxable income number.  Because churches don't have to file a Form 990 or any other financial report, no one really knows what their "net profits" are, but I can verify that the several Catholic parishes I have belonged to during my life have had essentially zero net profits: they spent almost all their revenues on operating expenses, except for the occasional capital improvement (a new parish center or church renovation) which would produce depreciation deductions over time.  In other words, churches wouldn't have $100 billion of taxable income; their "profit" after operating expenses probably is close to zero in most cases.

But let's assume I'm wrong, and churches have pre-tax profits equal to, say, the average pre-tax profit margin of the S&P 500 for the past twelve years.  That pre-tax margin appears to be something like 9.2% (this story notes that the 12-year average net profit margin has been about 6%; if you gross that up to adjust for the 35% corporate tax rate, you get roughly 9.2% pre-tax).  But let's be generous and round that number up to a 10% pre-tax margin.  Now you're talking about net profits of $10 billion, not $100 billion, and Dr. Cragan's $35 billion subsidy suddenly becomes $3.5 billion.

But even that is wrong.  Under current law, donations to churches probably wouldn't be income even absent tax exemption, since donations likely would be considered gifts under Section 102, which are excluded from the income of the recipient (Section 102 applies to all taxpayers, not just charities).  So unless Dr. Cragun is suggesting that we should repeal Section 102, his actual subsidy number is now zero. And that also wipes out the $6.1 billion in estimated STATE income tax subsidy, because states almost always key off Federal tax law in calculating state taxable income (e.g., gifts would be excluded from state taxable income, as well). 

So now we've whittled Dr. Cragun's subsidy number down to $30 billion.  But that's still pretty large.  What about the rest of it?  Well, the largest chunk of what's left is his estimate of a $26 billion loss via property tax exemption.   Here's how he explains his methodology:

The Hartford Seminary estimates that there are 335,000 congregations in the United States. 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). 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.

If a student used this kind of analysis in a paper for my Tax-Exempt Organizations class, I'd give them a "C" at best.  This isn't a serious attempt to value the property tax exemption for churches; a truly serious study would take a locality-by-locality analysis, using available property tax records and individual local property tax rates, which vary enormously.  Such a study would be hard and vastly time-consuming, which is probably why no one (to my knowledge) has done it.  And I don't know where Dr. Cragun gets the approximately 4.3% effective tax rate he is using here (he doesn't explain how he gets to $26.2 billion at all; I reverse-engineered his tax rate).  In one truly serious academic study of the value of tax-exemption for non-church charities - see Joseph B. Cordes, Marie Grantz and Thomas Pollak, What is the Property-Tax Exemption Worth? in Property Tax Exemption for Charities, Evelyn Brody, ed. (Urban Institute Press 2002), the authors use between a 1.3 and 2.1% national rate based on data from the Minnesota Taxpayers Association (1999) and the National Bureau of Economic Research (2000).  I doubt national property tax rates have doubled or tripled in 10 years; so even if I accepted Dr. Cragun's estimate of the total value of church-held property (which I don't; the truth is that we simply don't have a good such estimate because churches aren't required to report this number anywhere), using the Cordes, et. al. methodology yields a tax benefit of $7.8 - 12.6 billion, not $26 billion.  What the real benefit of property tax exemption to churches, however, is simply unknown.  Dr. Cragun's estimate may be low (as he suggests in his footnote 25) or it may be high.  The point is that without better data, any number is pure speculation

I have no argument with the basic proposition that churches get substantial tax benefits from property tax exemption and other tax breaks, but there are so many issues with the $71 billion number that I cannot take it seriously.  Neither, in my view, should the press.

JDC

http://lawprofessors.typepad.com/nonprofit/2012/11/a-71-billion-tax-break-for-churches-no-way.html

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Comments

you said that no one knows the net profit churches make, yet you then go on and say they make 0 or something close to that. Your numbers are in turn just as wrong as you claim Dr. Craguns' are. Also what are your qualifications because i don't see your evaluation stacking up to a Ph.D.

Posted by: michael | Apr 1, 2013 4:56:22 PM

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