A federal judge has ruled that an Internal Revenue Service exemption that gives clergy tax-free housing allowances is unconstitutional. The exemption applies to an estimated 44,000 ministers, priests, rabbis, imams and others. If the ruling stands, some clergy members could experience an estimated 5 to 10 percent cut in take-home pay.
U.S. District Court Judge Barbara Crabb ruled on Friday (Nov. 22) in favor of the Freedom From Religion Foundation, saying the exemption violates the establishment clause because it “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.” The case, decided in the District Court for the Western District Of Wisconsin, will likely be appealed to the the 7th Circuit, which could reverse the decision. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana. Earlier this month, the 7th Circuit barred the enforcement of the contraceptive mandate, a church-state issue being considered by the Supreme Court. If the court decision stands, it could have a significant impact on clergy income. Clergy that earn an average of $50,000 per year, may receive another a third of income, or $16,000, from a tax-free housing allowance, essentially earning $66,000. The cut in taxes ($4,000 in this case), would mean an 8 percent cut in salary. The Hosana-Tabor v EEOC case decided last year that a teacher could be considered a “minister,” so the exemption could extend beyond traditional members of the clergy. The exemption is worth about $700 million per year, according to the Joint Committee on Taxation Estimate of Federal Tax Expenditure. Judge Crabb ruled that the law provides that the gross income of a “minister of the gospel” does not include: “the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.” More