Supreme Court Must Ensure All Charities Get Fair Tax Treatment

The US Supreme Court will soon hear arguments in an appeal of a Wisconsin Supreme Court ruling against Catholic Charities Bureau, elevating a critical matter of tax policy and religious exemptions to the national stage. The central question is whether CCB, a religiously affiliated organization providing social services, is exempt from paying unemployment taxes.

Exempting CCB from unemployment taxes because of its connection to a religious institution—despite its services being indistinguishable from those of secular charities—would grant it and similar organizations an unfair financial advantage.

Such a finding would hurt non-religious organizations in sectors where many religious-affiliated organizations operate. Allowing tax exemptions to accrue to enterprises that can claim their secular activities are driven by a religious motivation would open a Pandora’s box of unintended consequences—one that would be difficult to close.

Religious organizations play an outsized role in the nonprofit world, with some data suggesting nearly half of charities in the US bear some religious connection. But when religious-affiliated entities engage in activities that mirror those of secular organizations, they should be subject to the same rules and obligations.

CCB asserts that levying a tax on religious-affiliated organizations providing non-religious social services equates to the government defining what is and isn’t “typical” religious behavior. But this argument gets the issue backward.

To exempt a religiously affiliated secular organization from unemployment taxes is to distort the marketplace of charities. A holding for CCB would mean two organizations engaging in the same activities would have different tax outcomes based purely on what motivates them, which could be difficult to prove.

CCB and its sub-entities perform services such as job placement for individuals with physical disabilities and daily living assistance for people with developmental or mental health disabilities. These activities needn’t be motivated by an underlying religious principle.

Another factor is that unemployment taxes are a public good in that they support workers when they suffer adverse employment outcomes and help stabilize local economies during financial hardship. These policy goals align with an organization that seeks to assist the public—especially one that serves in the job training and placement sector.

When organizations such as CCB don’t have to pay those taxes, their share of the cost is shifted onto other employers, including secular nonprofits. Effectively singling out secular nonprofits for unemployment taxation is indefensible. Charitable organizations must compete in the marketplace the same way as any for-profit enterprise; allowing one group to operate with significant tax advantages undermines fair competition and equity in policy.

A ruling in favor of CCB also would encourage other religiously affiliated organizations to pursue similar exemptions, further eroding the equitability of tax systems. Claims by hospitals, schools, and social service agencies could potentially expand the types of entities that have exemptions and the number of exemptions themselves.

Religiously affiliated hospitals, for instance, operate as regular employers in the health-care industry. Based on a verdict for CCB, they could still argue that they engage in the practice of their religious tenets. Allowing those hospitals to claim exemptions for performing the same work as secular nonprofit hospitals would put an economic thumb on the scale.

Such a precedent would weaken the tax system’s integrity and open the door for abuse. Organizations with peripheral or nominal ties to religious organizations could seek exemptions for various activities, claiming religious motivations for work far afield from traditional charitable endeavors. This abuse would strain state resources and reduce tax authorities to subjective evaluations of organizations’ claims, leading to inconsistent outcomes and discrimination.

This precedent also could blur the distinction between religious and secular operations—exemptions originally designed to respect genuine religious exercise could devolve into fertile grounds for attempts to avoid taxes. For instance, existing secular job training service organizations may need only to vaguely point in the direction of a religious philosophy to enjoy substantial tax benefits. Such an erosion of boundaries would harm religious organizations as much as their secular counterparts.

If exemptions become seen as a tool to improve tax outcomes, the public may push for tighter scrutiny or elimination of those benefits, curtailing the legitimate role of religious organizations in society and leaving them vulnerable with diminished goodwill.

In an amicus brief for CCB, the Wisconsin legislature said, “No group should have to satisfy a panel of judges that it is religious enough for a tax exemption.” The pronouncement sounds great on paper but falls apart after a moment’s reflection.

Religious tax exemptions are inherently subjective determinations if there is to be any oversight to prevent abuse and ensure fairness. Without standards and some regulatory body or judiciary to enforce them, exemptions would devolve into a free-for-all. Any organization with a tenuous connection to a religion and a narrative for how religious tenets drive its activities could enjoy preferential tax treatment.

The ultimate question posed to the Supreme Court shouldn’t be whether CCB or any other organization is religious enough, but whether its activities qualify under a narrowly tailored exemption designed to respect religious liberty while upholding public responsibilities. CCB’s services, commendable as they may be, are secular and indistinguishable from those provided by nonprofits that will pay Wisconsin’s unemployment tax regardless of the court’s decision.

Upholding the Wisconsin Supreme Court ruling would preserve fairness, protect the integrity of the tax system, and reaffirm the shared responsibilities that bind all public-serving organizations. There is no denial of a religious right in asking that organizations benefiting from public systems also contribute to them.

The case is Catholic Charities Bureau, Inc. v. Wisconsin Labor & Industry Review Commission, U.S., No. 24-154, amended order 12/16/24.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

Read More Technically Speaking