If you’re wondering what the First Amendment to the U.S. Constitution and religious liberty have to do with taxes, you’re probably not alone. These issues are converging in the news now that the U.S. Supreme Court (“SCOTUS”) just agreed to hear a religious tax exemption case.
Essentially, the High Court will decide whether the Catholic Charities Bureau of the Diocese of Superior in Wisconsin and its affiliated organizations should be exempt from Wisconsin’s unemployment tax system.
Unemployment taxes help fund unemployment benefits, supporting those who lose their jobs. Catholic Charities has reportedly paid the tax since the 1970s.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
On its face, this case (Catholic Charities Bureau v. Wisconsin Labor and Industry Review Commission) might sound like a less-than-tantalizing state-level labor tax dispute. However, many will be watching to see how the court’s eventual ruling might reshape the landscape of religious liberty and tax law across the United States.
So, here’s what you need to know.
SCOTUS to hear tax case in 2025
The Catholic Charities Bureau is a social service organization affiliated with the Diocese of Superior in Wisconsin.
- Founded over 100 years ago, the Bureau operates various programs to assist the poor, older adults, and those with disabilities
- Catholic social teachings reportedly guide the organization
- But Catholic Charities says it serves people without regard to their religious beliefs
In this case, the Bureau argues that it and four agencies under its control should be exempt from Wisconsin’s state unemployment tax because they operate "primarily for religious purposes.” However, the Wisconsin Supreme Court looked at the nonprofit organizations involved ( not the church) and ruled the organization's activities aren't religious in nature. Thus, they denied the tax exemption.
Writing for the majority, Wisconsin Supreme Court Justice Ann Walsh Bradley explained, “If we looked to the church's purpose in operating the organization only, then any religiously affiliated organization would always be exempt."
In a release regarding the state’s ruling, attorney Eric Rassbach stated, “Penalizing Catholic Charities for serving Catholics and non-Catholics alike is ridiculous and wrong.” Rassbach is vice president and senior counsel at the Becket Fund for Religious Liberty and lead attorney for the charities in the case.
In its appeal to the U.S. Supreme Court, Catholic Charities contends that the Wisconsin Supreme Court's denial of the exemption violates First Amendment constitutional protection of religious freedom.
SCOTUS has agreed to consider whether the obligation to pay the Wisconsin unemployment tax infringes upon protections for religious organizations in the U.S. Constitution.
Unemployment tax: Who pays?
The Federal Unemployment Tax Act (FUTA) exempts churches and religious organizations under section 501(c)(3) of the Internal Revenue Code from paying unemployment taxes that most employers pay, according to the IRS.
Many states follow the federal example and exempt religious organizations from state unemployment taxes (SUTA). However, the exemption typically applies only to entities operated “primarily for religious purposes.”
In Wisconsin, employers pay unemployment tax and contribute based on each employee's wages up to a taxable wage base of $14,000. Different rate schedules apply to small and large employers, and contributions finance the state's unemployment insurance program.
The state argues that Catholic Charities and its affiliates are primarily non-religious because their activities are mainly secular. They serve people of all faiths and focus on social services rather than religious instruction or worship.
- The organization provides assistance based on humanitarian needs, not religious criteria, which the state sees as evidence of a fundamentally non-religious operational model.
- Also, employees of Catholic Charities reportedly don't have to be Catholic, and people receiving services from these organizations receive no religious training or orientation.
- The court also noted that the charity doesn’t proselytize or provide religious materials to its program participants.
As a result, the court found that an "objective examination" of Catholic Charities' activities reveals them to be secular in nature.”
In doing so, it emphasized that an organization's motivations and activities are each factors in determining whether it "operated primarily for religious purposes" under state law.
Why this tax case matters
This case is significant since it adds to the conservative Supreme Court's recent string of decisions expanding religious freedoms.
For example, two years ago, in Kennedy v. Bremerton School District, the Court ruled in favor of a public high school football coach. The Court held that Kennedy’s right to pray on the field after games was protected under the First Amendment.
Last year, the Court’s decision in Groff v. DeJoy, a case involving a USPS worker working on the Sabbath, enhanced safeguards for workers seeking religious accommodations. In 303 Creative v. Elenis, the court supported a web designer's refusal to create websites for same-sex weddings based on her religious beliefs.
Additionally, a ruling in favor of Catholic Charities could potentially:
- Lead to a broader interpretation of religious exemptions in other areas of taxation
- Influence how states and the federal government approach the separation of church and state
- Impact funding and operations of religiously affiliated hospitals, universities, and other charitable organizations that serve the general public.
On the Freedom From Religion Foundation website, FFRF Senior Counsel Sam Grover writes, “The special exemption that the Catholic Charities Bureau is seeking would naturally extend to countless other nonprofits. Thousands of nonreligious employees at hospitals, colleges, and other organizations could lose their unemployment coverage if the Supreme Court overturns [the Wisconsin Supreme Court decision].”
FFRF is a nonprofit organization promoting constitutional principles of the separation of church and state.
As the Court prepares to hear arguments, likely in the spring, many will ponder how this case and the conservative court majority will impact U.S. tax law. Buckle up.
Related
-
Original Medicare vs Medicare Advantage Quiz: Which is Right for You?Quiz Take this quick quiz to discover your "Medicare Personality Type" and learn whether you are a Traditionalist, or a Bundler.
-
Ask the Editor: Capital Gains and Tax PlanningAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on capital gains tax rates and end-of-year tax planning
-
Time Is Running Out to Make the Best Tax Moves for 2025Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
