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The federal income tax revenue that would be generated by removing the tax exemption for churches would not be enough to reduce income tax rates for individuals to 3%.
A viral image suggests that if churches were required to pay taxes, individuals would be in tax heaven, but the claim actually doesn’t have a prayer.
The image, with a picture of a gleaming church, states:
"Something to ponder. The yearly cost of religious tax exemptions: $71,000,000,000. IF THE CHURCH PAID TAXES, EVERYONE WOULD ONLY HAVE TO PAY 3% TAXES. TAX THE CHURCHES."
The numbers don’t add up.
"Even if we bent logic to treat churches as for-profit entities, and assumed an ordinary rate of profit for them, the tiny amount of additional revenue this would generate wouldn't budge individuals' effective tax rate at all," said Jared Walczak at the Tax Foundation, who has written about similar claims.
The federal tax exemption for churches dates back more than a century.
Corporations or associations organized for religious, charitable, or educational purposes were defined as exempt from tax in the original 1913 law establishing the income tax.
Churches are automatically considered tax exempt if they meet the requirements of section 501(c)(3) of the Internal Revenue Code, which applies to charitable organizations. That section specifies "exempt purposes," such as relief for the poor, advancement of religion, and advancement of education or science.
Many states and localities also exempt these organizations from property and sales taxes related to fulfilling their missions.
But tax-exempt organizations are still subject to some taxes. For example, the exemption doesn’t apply to the payroll taxes that cover the costs of Medicare and Social Security for their paid employees. Tax-exempt organizations that have paid employees are required to pay their share of these payroll taxes and withhold their employees’ share, too.
Tax-exempt organizations may also have to pay corporate taxes on income from business ventures that are unrelated to the main reason for which they are tax-exempt.
So the proposal to "tax the churches" would be in addition to these taxes, the categories that are still exempt.
The viral image suggests that the tax revenues lost through such exemptions is $71 billion. If that were the case, collecting those taxes would add about 2% to the government’s total annual tax revenue, which is about $3.8 trillion.
But the real cost of the federal income tax exemptions for churches and other exempt religious organizations is far less: $2.4 billion, according to Walczak, who bases his calculation on the benchmark of a 7.7% profit margin across all industries. If it were collected, it would add 0.06% to federal revenue, not nearly enough to allow tax rates for everyone else to be slashed to 3%.
"The income tax revenue that could be generated is too minimal to change anyone's tax rates."
Walzak also argues that the image "uses this intentionally impossible assumption that a nonprofit earns income. The only appropriate amount of net income tax from a nonprofit is $0."
In the aggregate, U.S. taxpayers pay 13.28% of their adjusted gross income in federal income taxes, Walczak told PolitiFact.
Even if the $71 billion figure in the image were to include all taxes that churches are now exempt from — including state, property and sales taxes — it would be inaccurate, Walczak said.
Bottom line, he said, "even if governments went all-in on the taxation of churches, tossing out all the ordinary rules of taxation, they could only generate a few billion dollars, a drop in the bucket in a system with $3.8 trillion in federal tax collections and about $1.8 trillion in state and local tax collections."
We rate the claim in the image False.
Facebook, post, Aug. 17, 2021
AFP Fact Check, "Facebook posts exaggerate impact of taxing US churches," Sept. 24, 2021
Lead Stories, "Fact Check: Taxing Churches Would NOT Mean Everyone Would Only Pay 3% Of Their Taxes," July 15, 2021
IRS, "Exemption Requirements - 501(c)(3) Organizations," Sept. 7, 2021
IRS, "Exempt Purposes - Internal Revenue Code Section 501(c)(3)," Sept. 7, 2021
Congressional Research Service, "Tax Issues Relating to Charitable Contributions and Organizations," Aug. 4, 2020
Tax Foundation, "What If We Taxed Churches?", Sept. 9, 2021
Email, Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation, Sept. 27, 2021
Email, William Gale, co-director of the Tax Policy Center, Sept. 27, 2021
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