By Dr. Stanley Carlson-Thies

The controversial and poorly designed so-called church parking tax was repealed on December 20, 2019, when President Trump signed two new spending bills into law. The repeal erases the tax as if it had never been created as part of the Tax Cuts and Jobs Act of 2017. Democratic leaders in the House of Representatives called on the IRS to specify how churches, mosques, and other religious and secular nonprofits that paid the tax can recover the funds, and to expedite refunds. The IRS has now specified how organizations that paid the tax can claim a refund.

The tax had imposed a new, and for some, heavy cost on organizations that exist not to profit themselves, but rather to serve others. The tax was so complex to understand and hard to calculate that smaller houses of worship and charities that tried to comply may well have spent more on legal and accounting guidance than they owed in taxes. But most troubling, the tax and its filing requirement were an “unprecedented breach,” in the words of Nathan Diament of the Union of Orthdox Jewish Congregations of America, in the independence that American law, constitutional principles, and historic practice have maintained between church and state.

What became labeled as the “church parking tax” was a new – for nonprofit organizations – tax on a range of employee benefits,intended by the congressional tax writers to equalize the tax consequences of those benefits between nonprofit and for-profit employers. But should there be such equality? Nonprofits, by design, have always been treated differently in the tax code, and generally have not been required to pay taxes, except on income unrelated to their nonprofit purposes (known as Unrelated Business Income Tax or UBIT).

In particular, houses of worship and certain related religious entities not only have been exempt from paying taxes, but also from filing information returns to the IRS (Form 990) and from having to apply to the IRS in order to have 501(c)(3) tax-exempt status. Why do they get the status without application and have the freedom from filing the information reform? It’s because these are ways to implement the free exercise and no-establishment guarantees of the First Amendment. These exemptions keep the government from illicitly getting entangled in the internal affairs of primary religious organizations. It is not only that a requirement that houses of worship must pay taxes would reduce the good that they otherwise would do in their communities, but also that the very mechanisms involved in taxation, registration, and reporting undermine the separation needed to protect religion from governmental interference.

Even before the church parking tax was created by the tax reform law in late 2017, houses of worship that earned more than a limited amount of UBIT were required to file a 990-T form with the IRS and to pay a tax. But with the new law, suddenly tens of thousands of churches, mosques, temples, synagogues, and other houses of worship – many very small in size – had been able to stay at a distance from the IRS and its taxing and reporting requirements were instead obligated to calculate an unprecedented tax and file unprecedented reports.

This break with precedent, with the celebrated American religious freedom arrangement that maintains a distance between the institutions of government and the institutions of religion to preserve the rightful autonomy of both, was the most serious flaw of the church parking tax. The breach was more consequential than the sucking of hundreds of millions of dollars out of the bank accounts of nonprofits to be delivered to the federal tax coffers, to the detriment of the variegated community good accomplished by America’s extremely varied and entrepreneurial nonprofit organizations, both religious and nonreligious.

When religious institutions – even houses of worship – do wrong, it is essential for government to step in. But with the church parking tax, the federal government stepped in not to right a wrong, but simply to increase its tax take. That move was detrimental for all nonprofits, but was especially harmful for synagogues, mosques, and churches. It is good news that Congress and the President have now erased this ill-designed policy innovation.

Dr. Stanley Carlson-Thies is founder and senior director of the Institutional Religious Freedom Alliance, a division of the Center for Public Justice.