Transparency and Tax Exemption for Religious Institutions in the USA

By Richard Marker

[Despite the opening paragraph, this post is not about politics; it is of relevance to philanthropy.]

This week, at the annual national Prayer Breakfast, the current president issued a strong statement advocating the repeal of a limitation on political lobbying from the pulpit. That particular issue is not one I feel super strongly about, but it does, en passant, elicit thoughts about a philanthropy matter about which I do.

The facts: #1. Nonprofit organizations in the USA are exempt from paying taxes on their income. #2. Some nonprofits, typically referred to by their tax category as 501 c3 organizations, have an additional advantage: their donors can deduct their contributions to those organizations in their own tax filing.

All of these organizations are required to file tax returns that are available to the public – nowadays mostly through Guidestar. You and I can look at the tax returns to decide if the money is being well spent, and tax authorities can determine if the money is being raised and spent legally. Indeed, a few years ago, the 990 form itself was revised to allow more clarity and transparency on matters of interest to both funders and tax authorities. Transparency matters – as it should. Each of us can choose to study those returns, and each of us can decide if any of the information contained in those public forms should inform our funding decisions.

There is one exception to the accountability rules. Religious Institutions have a third benefit not available to any other organization: #1. they need not pay taxes on income, #2. they can offer tax deduction to donors, AND #3, they need not file any tax return at all. In other words, churches and synagogues and temples and mosques and any other self-defined religious institution can do business however they wish with no regular accountability for audits or tax returns or affirmation of its financial activities.

The ostensible reason for this exemption is the separation of faith and state. I am a firm believer in this separation and affirm that it is a core Constitutional guarantee, and an American value since 1776. And, full disclosure, for part of my career I worked for an organization that had that benefit. Yet I have come to believe that this specific application of the Church-State separation is no longer appropriate.

Religious institutions continue to be a huge financial sector in the USA, and funders/members/adherents should have the same access to information about how their money is spent that donors to any other tax exempt organization should have. However, many religious institutions do not want the onus of preparing taxes, nor do they want to be interwoven into a public tax system; they therefore do not file any public record of their finances. [BTW, currently they are permitted to do so, just not required to do so.]

Therefore, I would propose a modification of the law to allow a choice: Religious institutions can choose to opt in to the rules applicable to transparency and accountability relevant to all 501c3 such as filing an annual 990, or they may choose to remain outside the system as at present.

Organizations that choose to opt in will be permitted to offer donors the tax deductibility, benefit #2 mentioned above. If a religious organization chooses not to, that will continue to be their right, and they would retain their tax-exempt status as at present, but they would no longer be able to offer tax deductibility to their donors and contributors.

Let me reiterate: In no way does this proposal allow or encourage state intervention or encroachment in the religious matters of any organizations beyond that required today. It is an historic quirk that provided this unique transparency exemption. That time, I believe, has passed.

I am sure that there are objections I don’t fathom [I am equally sure that respondents will make sure I learn of them.]. I have no idea what percentage of religious institutions would choose which option. But at a time when we demand transparency, ethics, and accountability in the nonprofit sector as a whole, there is no real reason to exempt this huge sub-sector from the financial ground rules governing the rest.

Richard Marker advises funders and foundations on their philanthropy strategy through Wise Philanthropy, and teaches philanthropists and foundation professionals at both Penn’s Center for High Impact Philanthropy and NYU Academy for Funder Education.