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<DIV class=timestamp>October 11, 2006</DIV>
<DIV class=kicker><NYT_KICKER>In God’s Name</NYT_KICKER></DIV>
<H1><NYT_HEADLINE type=" " version="1.0">Religion-Based Tax Breaks: Housing to
Paychecks to Books </NYT_HEADLINE></H1><NYT_BYLINE type=" "
version="1.0"></NYT_BYLINE>
<DIV class=byline>By <A title="More Articles by Diana B. Henriques"
href="http://topics.nytimes.com/top/reference/timestopics/people/h/diana_b_henriques/index.html?inline=nyt-per">DIANA
B. HENRIQUES</A></DIV><NYT_TEXT></NYT_TEXT>
<DIV id=articleBody>
<P>For tens of millions of Americans, the Rev. Rick Warren is best known for his
blockbuster spiritual guide, “The Purpose Driven Life,” which has sold more than
25 million copies; his success as the founder of the 22,000-member Saddleback
Church in Lake Forest, Calif.; and his efforts on behalf of some of the world’s
neediest people.</P>
<P>But for tens of thousands of ministers — and their financial advisers — <A
href="http://www.nacba.net/Warren/Warren.htm">Pastor Warren will also be
remembered as their champion</A> in a fight over the most valuable tax break
available to ordained clergy members of all faiths: an exemption from federal
taxes for most of the money they spend on housing, which typically represents
roughly a third of their compensation. Pastor Warren argued that the tax break
is essential to poorly paid clergy members who serve society. </P>
<P>The tax break is not available to the staff at secular nonprofit
organizations whose scale and charitable aims compare to those of religious
ministries like Pastor Warren’s church, or to poorly paid inner-city teachers
and day care workers who also serve their communities.</P>
<P>The housing deduction is one of several tax breaks that leave extra money in
the pockets of clergy members and their religious employers. Ministers of every
faith are also exempt from income tax withholding and can opt out of Social
Security. And every state but one exempts religious employers from paying state
unemployment taxes — reducing the employers’ payroll expenses but also leaving
their workers without unemployment benefits if they are laid off.</P>
<P>Another religion-based tax break — the only one consistently defeated in the
courts in recent years — is an exemption from state sales taxes for religious
publications but not for secular ones.</P>
<P>This sales tax break has been struck down as unconstitutional in at least
five states, most recently in Georgia in February, <A
href="http://www.nytimes.com/packages/other/business/20061011budlong.RTF">when a
United States District Court judge, Richard W. Story, ruled</A> that “the unique
and preferential treatment the state provides to ‘religious’ literature raises
serious constitutional concerns” under the First Amendment clause prohibiting an
“establishment” of religion.</P>
<P>Yet a few states still have a sales tax exemption for religious publications.
One of them is Florida, where state officials, lawyers for two religious
publications and a national religious liberty advocacy group have joined forces
to defend the tax break from a constitutional challenge waged almost
single-handedly by an Orlando lawyer named Heather Morcroft.</P>
<P>Ms. Morcroft is a Legal Aid staff lawyer who works with foster children. She
is a believer in Wicca, which she described as a neo-pagan faith loosely based
on the traditions of ancient earth-centered religions, and serves as president
of the state’s small Wiccan Religious Cooperative.</P>
<P>The cooperative is the formal plaintiff in the pending lawsuit Ms. Morcroft
filed almost five years ago to challenge the constitutionality of the Florida
exemption. Her arguments echo those that have prevailed in other states: that by
exempting religious publications from the sales tax, the government is favoring
religious ideas over secular ones, and that tax officials should not be in the
business of deciding what publications are sufficiently religious to be
exempt.</P>
<P>In contrast to Ms. Morcroft’s lonely fight in Tallahassee, Pastor Warren, who
declined to be interviewed for this article, had a host of allies when he went
to battle to defend the special tax deduction for housing expenses of clergy
members. Ultimately, the allies included both houses of Congress and the
president of the United States.</P>
<P><SPAN class=bold>The Housing Exemption</SPAN></P>
<P>The one small passage in the vast federal tax code that originally conferred
the housing-expense exemption on clergy members did not cap the deduction. But
in 1971, the <A title="More articles about the Internal Revenue Service."
href="http://topics.nytimes.com/top/reference/timestopics/organizations/i/internal_revenue_service/index.html?inline=nyt-org">Internal
Revenue Service</A> limited it to the “fair market rental value” of the
furnished home, utilities included.</P>
<P>During a routine audit in 1996, according to court documents, the I.R.S.
decided that Pastor Warren’s housing deduction exceeded the rental value of his
new home on Via Del Sol in the rugged Trabuco Canyon, southeast of Los
Angeles.</P>
<P>That’s when the fireworks began.</P>
<P>Pastor Warren, who gives 90 percent of his considerable income to charities,
later explained in an open letter to other ministers that he decided to sue
because the housing allowance was the only way small churches could pay their
pastors enough to live — and he knew that those ministers could not fight the
I.R.S. as he could.</P>
<P>The deduction, usually called the parsonage exemption, is available to
ministers, rabbis and other clergy members of all faiths working at houses of
worship. It allows them to live in congregation-owned housing without being
taxed on the imputed value of their free housing, as almost all other employees
are when they live in company-paid housing. </P>
<P>Since 1954, the provision had also shielded clergy members from taxes on the
entire portion of their paycheck designated by their congregations as a housing
allowance, whether they spent it on renting an apartment or buying their own
home. But the rules the I.R.S. adopted in 1971 limited the deduction to the
smallest of three amounts: the “fair market rental value” of the home, the
housing allowance paid to the minister or the minister’s actual housing
expenses.</P>
<P>That ruling lighted the long fuse that, decades later, propelled Pastor
Warren into court.</P>
<P>It took four years — and far more of Pastor Warren’s money than the $55,300
disputed in the audit — but on May 16, 2000, the United States Tax Court struck
down the I.R.S.’s cap and ruled that clergy members could deduct “the amount
used to provide a home,” however much that might be.</P>
<P>If the story had ended there, Pastor Warren’s battle would have been an
unequivocal victory for the clergy. But the I.R.S. appealed to the United States
Court of Appeals for the Ninth Circuit in San Francisco. And in March 2002, that
court raised an unexpected question: was this tax break constitutional? Or did
it treat the clergy so favorably that it violated the First Amendment?</P>
<P>The court appointed <A href="http://www.nacba.net/Warren/Warren.htm">Erwin
Chemerinsky</A>, a law professor then on the faculty at the <A
title="More articles about University of Southern California"
href="http://topics.nytimes.com/top/reference/timestopics/organizations/u/university_of_southern_california/index.html?inline=nyt-org">University
of Southern California</A>, to research the constitutional issue and file a
friend-of-the-court brief. The court was immediately pelted with defending
arguments from lawyers representing almost every religious organization in the
country, from the Central Conference of American Rabbis to the Church of the
Nazarene.</P>
<P>Some defenders noted that employees required to live in certain places for
the convenience of their employer, as pastors are, had long been eligible for
tax relief. (A similar exemption is available to some military and diplomatic
personnel. But only clergy members can apply it so broadly — for example,
applying it even when they work for a church they themselves founded at a
location of their own choosing, as was the case with Pastor Warren.)</P>
<P>Others argued that tax deductions favoring religion had been granted for more
than 200 years without any objections from the Supreme Court, and this one was
no exception. And a few simply pleaded that clergy members deserved the
deduction because they were so poorly paid for their contributions to
society.</P>
<P>Professor Chemerinsky studied the relevant First Amendment case law,
especially the 1989 case <A
href="http://caselaw.lp.findlaw.com/scripts/printer_friendly.pl?page=us/489/1.html">Texas
Monthly v. Bullock</A> in which the Supreme Court had drawn the line at
government’s granting a “tax break to those who spread the gospel that it does
not also give to others.” He urged the appeals court to find the tax break
unconstitutional.</P>
<P>Under I.R.S. rules, he noted, this benefit is available to all clergy members
who administer sacraments, conduct worship and direct the spiritual life of a
religious institution. “The government thus has to determine what constitutes
‘sacraments,’ ‘religious worship’ and the ‘spiritual life’ of a religion and
then to evaluate whether the clergy member is sufficiently engaged in these
tasks,” Professor Chemerinsky continued.</P>
<P>“It is difficult to imagine a greater entanglement with religion than this
evaluation,” he wrote in his brief for the court. </P>
<P>Moreover, “the parsonage exemption is a subsidy for religion” and is
therefore unconstitutional, he argued. Current Congressional budget records show
that the exemption has cost the government as much as $500 million in tax
revenue a year, shifting that much of the national tax burden onto other
taxpayers.</P>
<P>He did not address the pastoral poverty argument in his court briefs, but in
an interview, he noted that poorly paid inner-city teachers and day care workers
do not benefit from the parsonage exemption, despite their service to
society.</P>
<P>Nor do people at secular nonprofit organizations engaged in humanitarian
work. Action Against Hunger U.S.A., based in New York, finances relief programs
in Africa, but its director, Cathy Skoula, pays taxes on her entire salary,
including what she spends on housing. So does Lawrence Rosenblatt, executive
director of the Bowery Residents’ Committee, which provides food, shelter and
counseling to sick, needy people in Lower Manhattan. </P>
<P>Even amid the distractions of the year after Sept. 11, the constitutional
challenge to the clergy housing deduction inspired wide coverage in religious
publications and some heated words on radio. Pastor Warren quoted comments made
to him by a conservative radio commentator, Hugh Hewitt, who said the issue
arose because of “the implacable hostility of the political left to the role of
God in the world and the country.”</P>
<P>But in fact, the political left and right joined forces with “almost
miraculous” speed to defuse this constitutional time bomb, according to Richard
R. Hammar, a lawyer and accountant who edits the Church Law and Tax Report
newsletter. Within 40 days, the <A
href="http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=107_cong_bills&docid=f:h4156enr.txt.pdf">Clergy
Housing Clarification Act of 2002</A> had been approved unanimously in both
houses of Congress and signed into law by President Bush.</P>
<P>“It was like the parting of the Red Sea,” Mr. Hammar said.</P>
<P>The new law, in Solomonic fashion, affirmed the unlimited deductions
ministers like Pastor Warren had taken in the past, but imposed the I.R.S.’s
“fair market rental value” restriction on deductions going forward. Satisfied,
the tax service withdrew its appeal, ending the constitutional challenge in San
Francisco.</P>
<P>Ministers of every faith are also exempt from income tax withholding. And
they can opt out of Social Security — an exemption that Mr. Hammar said was
probably widely abused. </P>
<P>Until 1968, clergy members were exempt from Social Security unless they
joined voluntarily. Since then, they have been automatically covered — but,
unlike other citizens, they are allowed to drop out as conscientious objectors
if they assert, by a certain point early in their ministry, that they have a
religious opposition to receiving public welfare benefits. </P>
<P>“Few people, outside of the Amish, could plausibly say that,” said Mr.
Hammar, an accountant who also has a law degree from <A
title="More articles about Harvard University."
href="http://topics.nytimes.com/top/reference/timestopics/organizations/h/harvard_university/index.html?inline=nyt-org">Harvard</A>
and attended its divinity school.</P>
<P>Yet his research shows that 3 of every 10 ministers in America have opted out
of Social Security. “The only conclusion is that the conscience-based objection
is usually really a financial decision,” he said.</P>
<P>Because the exemption is irrevocable, why would so many ministers take such a
drastic step? Clergy members are considered self-employed and therefore pay a
15.3 percent contribution to Social Security, Mr. Hammar explained. So young
ministers on tight budgets sometimes decide, or are persuaded, to drop out and
thereby give themselves a 15.3 percent raise.</P>
<P>“The vast majority of clergy who did opt out of Social Security never
replaced it with another retirement scheme,” he added.</P>
<P>Several times since 1968, religious denominations have urged Congress to
rescue these potentially destitute ministers. On three occasions in the last 20
years, most recently in 1999, Congress has done so, opening a two-year window
during which ministers who “irrevocably” dropped Social Security could
return.</P>
<P>Mr. Hammar said federal law and the laws of every state except Oregon also
exempt religious employers from the unemployment compensation laws that cover
other employers. Court rulings widened this exemption to include
religious-operated schools, he said, and in 1997 Congress expanded it further to
include schools “operated for a religious purpose” but not actually controlled
or affiliated with a religious denomination or institution.</P>
<P>As a result, he said, state courts have generally determined that workers who
are laid off from these exempt religious employers cannot collect jobless
benefits.</P>
<P><SPAN class=bold>Breaks on Sales Taxes</SPAN></P>
<P>In her 20 years as a lawyer, Heather Morcroft had never argued a case before
the Florida Supreme Court.</P>
<P>But there she was, on June 9 — standing alone on her side of the lofty
courtroom in Tallahassee <A
href="http://www.wfsu.org/gavel2gavel/archives/06-06.html">to challenge the
constitutionality of a Florida law</A> that exempts “religious publications”
from the state sales tax.</P>
<P>As Ms. Morcroft sees it, this exemption not only infringes on the liberty of
those faiths with writings that may not be deemed sufficiently religious to be
exempt, but it also puts government in the role of defining a religious
publication and then favoring that publication over secular ones.</P>
<P>None of that, she says, should be allowed under the First Amendment, which
provides, in part, that “Congress shall make no law respecting an establishment
of religion.”</P>
<P>Indeed, in that 1989 case in Texas, the <A
title="More articles about the U.S. Supreme Court."
href="http://topics.nytimes.com/top/reference/timestopics/organizations/s/supreme_court/index.html?inline=nyt-org">United
States Supreme Court</A> ruled that the government could “not place its
prestige, coercive authority, or resources behind a single religious faith or
behind religious faith generally” without violating the Constitution.</P>
<P>Some legal scholars argue that there was no clear majority opinion, and hence
no clear judicial guidance, in the Texas case. </P>
<P>But Ms. Morcroft noted in her lawsuit that since the Supreme Court decision
in the Texas case, federal and state courts in North Carolina, Pennsylvania,
Rhode Island and South Carolina, as well as Georgia, had “found that a sales tax
exemption for items based on their religious content is unconstitutional.”</P>
<P>Florida is one of several states that still have some sort of sales tax
exemption for religious publications. </P>
<P>Lawyers defending the exemption, which costs the state just under $10 million
each year, say it is consistent with a long list of laws, adopted and upheld
since the nation’s birth, that have benefited religion in some way. Governments
“have found it prudent to avoid entanglement of religion with the state taxation
process by providing exemptions,” argued Kevin Shaughnessy, a lawyer in the
Orlando office of Baker & Hostetler who represents The Florida Baptist
Witness and The Florida Catholic, which benefit from the exemption. Similar
arguments were made by Liberty Counsel, a religious freedom advocacy group in
Orlando.</P>
<P>Most states give religious groups some sort of broad sales tax exemption, but
most do so simply by including religious organizations in omnibus exemptions
that cover sales to, and sometimes purchases from, nonprofit groups of all
sorts. </P>
<P>But a few states go further, exempting specific kinds of religious
publications from sales taxes no matter who buys or sells them, said John L.
Mikesell, a professor at <A title="More articles about Indiana University"
href="http://topics.nytimes.com/top/reference/timestopics/organizations/i/indiana_university/index.html?inline=nyt-org">Indiana
University</A> and the co-author of a widely used primer on sales taxation. They
include Florida, Massachusetts and Texas, which revised its statute after the
Texas Monthly case.</P>
<P>Several other states grant special treatment to sacramental equipment and
supplies, and to materials a private contractor buys for use on many religious
construction projects.</P>
<P>The difficulty of applying these exemptions in real life was revealed in
Tallahassee, when Justice Barbara J. Pariente quizzed James A. McKee, the state
attorney defending the Florida statute, about how the state went about “deciding
whether my Bible is really a religious text, or if it is historical or something
else.”</P>
<P>Mr. McKee quickly assured her that the revenue department left those
constitutionally sensitive “content” decisions to the booksellers. “It’s similar
to a statute that exempts certain food items,” he explained. “The grocery store
is actually the one that makes the determination.”</P>
<P>Sounding a little shocked, Justice Pariente asked, “So they can say anything
is religious and there is no challenge to it?”</P>
<P>Mr. McKee did not directly respond to her question — but booksellers
have.</P>
<P>While there is no way of knowing how small bookshops decide what is an exempt
“religious publication,” big national booksellers have developed definitions to
guide their stores in Florida and other states with similar exemptions.</P>
<P>The problem is, their definitions are different.</P>
<P><A title="Barnes & Noble"
href="http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=BKS">Barnes
& Noble</A> recognizes a narrow category that includes the Bible and a short
list of other “sacred texts,” including the Talmud and the Koran, according to
Mary Ellen Keating, a company spokeswoman.</P>
<P>At Borders, the exemption is broader, including books on theology and
religious history as well as Bibles, hymnals, prayer books and the sacred texts
of all religions, according to Anne Roman, a spokeswoman there. </P>
<P>Hearing that, Ms. Morcroft said she was not surprised at the disparities. “I
have friends who shop at a local Christian bookstore,” she said. “They say the
only thing that’s ever tax-exempt there is the Bible.”</P>
<P>Like the many other tax and regulatory exemptions that have become available
to religious organizations in America, the tax breaks for clergy housing
expenses and religious publications benefit religion in ways that some critics
say go beyond the limits of the Constitution.</P>
<P>Until several years ago, “it was inconceivable for most to think that
religion might well be aggressively expanding its power in a way that is harmful
to the public good,” said Marci A. Hamilton, a law professor at the Cardozo law
school at <A title="More articles about Yeshiva University"
href="http://topics.nytimes.com/top/reference/timestopics/organizations/y/yeshiva_university/index.html?inline=nyt-org">Yeshiva
University</A> in New York and the author of “God vs. the Gavel: Religion and
the Rule of Law,” which is critical of many religious exemptions, particularly
in the areas of land use and family law.</P>
<P>But now, Professor Hamilton said, the power of religious entities “is at its
apex.” </P>
<P>Defenders of these exemptions deny that they raise any questions of excessive
power or constitutional violations. “Government deregulation of religion is
consistent with a broader pattern of American government going back to the
founding,” said Anthony R. Picarello Jr., vice president and general counsel of
the Becket Fund for Religious Liberty, a legal advocacy group in Washington.
</P>
<P>“Providing special treatment is not always constitutionally required,” he
said, “but it is constitutionally
permissible.”</P><NYT_AUTHOR_ID></NYT_AUTHOR_ID>
<P id=authorId>Andrew Lehren and Donna Anderson contributed to this
article.</P></DIV></FONT></DIV></BODY></HTML>