Supreme Court Says Secular Nonprofit Organizations Can Receive Religious Tax Exemptions

WASHINGTON — The Supreme Court ruled Thursday that a religious charitable foundation can opt out of paying taxes for unemployment compensation in a decision that threatens to revamp part of the federal-state insurance program.

Unemployment compensation provides financial benefits to workers who lose their jobs through no fault of their own.

A key issue in the Supreme Court ruling was a Wisconsin law that requires employers to pay payroll taxes that cover the cost of the insurance. Religious organizations are exempt.

The Supreme Court said forcing Catholic Charities Bureau Inc. to pay the taxes violates the separation of church and state required under the Constitution. The nonprofit organization provides assistance to disabled persons and persons needing mental health care.

The unanimous decision focused on a lawsuit filed by Catholic Charities in northern Wisconsin but it applies equally to religious institutions in all other states.

There are about 109,000 nonprofits with a religious mission operating in the United States, according to a 2023 Indiana University report.

The Wisconsin Labor & Industry Review Commission justified its refusal to grant Catholic Charities the tax exemption it gave other religious groups by saying there was a fundamental difference between them.

Other religious organizations provided charitable services directly by their clergy or staff while promoting religious beliefs. Catholic Charities offers secular services through a separate church-controlled nonprofit.

As a result, the nonprofit — although it was a charitable organization — was not operated primarily for religious purposes, attorneys for the Wisconsin Labor & Industry Review Commission argued.

The Wisconsin Supreme Court agreed with the Review Commission but the U.S. Supreme Court overturned the state court’s decision. It also sent the case back to a lower court for a new ruling.

The ruling could affect taxing decisions on religious-affiliated schools and hospitals, which employ hundreds of thousands of workers.

The unanimous Supreme Court decision written by Justice Sonia Sotomayor said the fine distinction between the church and its nonprofit is too small of a difference to create tax liability.

By distinguishing between churches and whether they operate separate nonprofit organizations, the state was discriminating among religions “based on theological differences in their provision of services,” she wrote.

Such discrimination is forbidden by the First Amendment’s establishment clause.

“It is fundamental to our constitutional order that the government maintain ‘neutrality between religion and religion,’” Sotomayor wrote.

Catholic Charities was represented by the Becket Fund for Religious Liberty, which said in a statement, “We’re grateful the court unanimously recognized that improving the human condition by serving the poor is part of our religious exercise and has allowed us to continue serving those in need throughout our diocese and beyond.”

Their attorney, Eric Rassbach, said the state had no business intervening in a church activity.

“It was always absurd to claim that Catholic Charities wasn’t religious because it helps everyone, no matter their religion,” Rassbach said. “Today, the court resoundingly reaffirmed a fundamental truth of our constitutional order: the First Amendment protects all religious beliefs, not just those the government favors.”

Wisconsin’s attorney general has not yet publicly commented on the case.

The Catholic Charities case is one of three the Supreme Court handled in its current term touching on how the government must accommodate religious beliefs. 

The case is Catholic Charities Inc. et al. v. Wisconsin Labor & Industry Review Commission et al. in the U.S. Supreme Court.

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