Tax Exemptions for Religious Organizations: What Does the Supreme Court Say?

Key takeaways:

• The U.S. Supreme Court justices appear poised to rule that Wisconsin is violating the First Amendment by denying a religious organization a tax exemption because the organization’s specific activities aren’t sufficiently “religious.”
• The state of Wisconsin estimates that a ruling in favor of the religious organization could translate to a loss of governmental benefits for about 1 million Americans because religious charities would no longer have to pay into unemployment tax funds.
• A ruling against the organization would mean increased government authority to determine when the services provided by a religious charity are sufficiently religious to be eligible for a tax exemption.
• The Supreme Court is expected to issue a ruling in June.

On March 31, 2025, the U.S. Supreme Court heard arguments in a case — Catholic Charities Bureau Inc. v. Wisconsin Labor & Industry Review Commission — that could affect whether religious charities not directly controlled by a church can be exempted from a tax paid by other charities. At stake is whether a state can decide whether the activities of a religious charity are sufficiently religious to receive a tax exemption.

Specifically, the question in this case is does a state law violate the First Amendment’s free exercise clause by denying a religious charity a tax exemption because the organization doesn’t meet the state’s own definition for operating in a religious manner? There seemed to be a clear majority — perhaps even unanimity — that the answer to this question is “Yes.” The justices expressed concern about government entanglement with religion; the case involves determining if the government can decide if a religious charity’s activities are sufficiently religious to qualify for a religious exemption to a tax paid by other charities. They also appeared to be concerned that Wisconsin’s denial of a religious exemption violates the free exercise of religion by discriminating against certain religions that don’t overtly engage in proselytizing or evangelizing in their charitable work. 

Now what happens?

If the Supreme Court rules for the state of Wisconsin, the Catholic Charities Bureau will be denied its exemption and must participate in state and federal unemployment tax programs. If the Supreme Court rules for the Catholic Charities Bureau — which seems to be the likely result — the court will send the case back to Wisconsin state courts to determine whether the organization’s charitable funding program meets the requirements of federal and state statutes. The Supreme Court may also ask the lower courts to determine whether the state can show any compelling state interest for denying the exemption and whether the state interest cannot be met in any way less restrictive to free exercise of religion.

What does it mean for me?

If the Supreme Court rules in favor of the Catholic Charities Bureau, it could significantly affect unemployment benefits nationwide. According to a lawyer for Wisconsin, about 1 million Americans could see reduced government support because religious charities would no longer pay into unemployment tax funds.

But there are bigger implications for how the government treats religious charities generally, beyond just tax and unemployment. It may affect other government-mandated programs, such as licensing requirements or health and safety regulatory programs. A decision in favor of the Catholic Charities Bureau would limit the authority of the government to define the religious nature of the charitable services offered by religious charities. Religious charities that are not “church controlled” would be treated in the same way as those that are. This ruling might mean that smaller groups could face less government scrutiny to prove their work is religious enough, as evidenced by the fact that groups ranging from the Lutheran Church to the International Society for Krishna Consciousness to the Sikh Coalition all filed briefs in the case.

If, on the other hand, the Catholic Charities Bureau loses, religious nonprofits would likely face more scrutiny concerning the religious nature of their service work.

How did this case start?

The Federal Unemployment Tax Act is a program that helps support state unemployment agencies that directly pay benefits to the newly unemployed. Businesses pay an amount into the program, based on the overall annual wages they pay to their workers. That money is then used to support job services and to provide reserve support to state unemployment agencies when there is a spike in unemployment; those agencies can also borrow from the federal fund as necessary.

Each state also has a state unemployment program, and businesses get a tax credit from the federal government allowing them to recoup as much as 90% of what they pay to their state program. Wisconsin’s law requires any business with more than four employees to participate unless exempted.

Since 1970, any church-controlled religious organization that is operated primarily for religious purposes has been exempted from paying the federal tax. Forty-seven states, including Wisconsin, have this exemption at the state level. In 1997, Congress amended the Federal Unemployment Tax Act to allow this exemption for any school operated primarily for religious purposes, even if it is not operated, supervised, controlled or principally supported by a church.

The Catholic Charities Bureau of the Diocese of Superior is a Wisconsin nonprofit that is separately incorporated, though part of the diocese of the Catholic Church — one of many such individual, but similar, charities that exist around the country. Like other such charities, it operates in conjunction with the local Catholic diocese to administer a program providing church-funded unemployment coverage at a significantly lower cost, known as the Church Unemployment Pay Program.

How did the case get to the Supreme Court?

In 2016, the Catholic Charities Bureau sought an exemption from the federal and state mandates because reliance on its own private program would allow it to direct more resources to those who need them. The Wisconsin Department of Workforce Development ruled against the organization, but an administrative law judge reversed this decision.

The department appealed to the Wisconsin Labor and Industry Review Commission, which also ruled against the Catholic Charities Bureau. The commission said that eligibility for the exemption is based on the organization’s activities, not its motivations. It noted the organization’s charitable activities weren’t “religious per se” — plenty of nonreligious organizations did the same work to help those in need — and didn’t qualify for this exemption.

The Catholic Charities Bureau filed a lawsuit in Wisconsin state court. That court said the organization does qualify for the exemption because “the test is really why the organizations are operating, not what they are operating,” and the Catholic Charities Bureau has a clear religious purpose and motive.

A Wisconsin Court of Appeals reversed the lower court, ruling in favor of the commission’s earlier decision that the Catholic Charities Bureau isn’t eligible for the exemption. It said that an organization can only qualify for the exemption if the organization has a religious motive and if its activities are primarily religious in nature, and it agreed with the commission that the Catholic Charities Bureau’s activities are not inherently religious.

The case finally went to the Wisconsin Supreme Court, which became the first decision-maker in this saga not to reverse the decision it was being asked to review. The Wisconsin Supreme Court said the religious nature of the activities themselves did matter and looked at criteria including whether the organization proselytized during the activities by, for instance, having religious services, outreach, ceremonies or education.

The Wisconsin Supreme Court also addressed and rejected another argument made by the Catholic Charities Bureau: that Wisconsin’s state law violates the First Amendment because it forces courts to determine the religious significance of an entity’s activities. The court held that this just wasn’t the case and noted the law was only deciding what the activities themselves were and whether they were based on religion at all.

What does the Catholic Charities Bureau argue?

The Catholic Charities Bureau argues that denying it the exemption from the federal unemployment tax violates the free exercise clause of the First Amendment, which protects the right of individuals and groups to practice their religion openly and freely without governmental interference. The Wisconsin Supreme Court ruled against the organization, in part because it is not formally aligned with the diocese and, moreover, its provision of charitable services is not inherently religious. But, according to the Catholic Charities Bureau, the religious principles of Catholicism require that it remain independent from the church itself. The services the charity provides are not only motivated by religion but also offered in ways consistent with the Catholic faith. In essence, the Wisconsin Supreme Court’s interpretation of the law imposes on a religious charity a government definition of religious practice, in violation of the free exercise of religion. The Catholic Charities Bureau also argues that this entangles church and state by forcing it to participate in a state-run unemployment program. Finally, the organization says that the unemployment program discriminates based on religion by allowing some religious programs to be exempted but not this one.

What does the state of Wisconsin say?

The state of Wisconsin says the state unemployment program does not entangle church and state — quite the opposite, as the program solely looks at the charitable activities involved and whether they are inherently religious or not. It also argues that the Catholic Charities Bureau cannot show that it was targeted based on its religious beliefs because the unemployment program does not affect the actual governance or inner workings of the church; it simply looks at whether this nonprofit is engaged in religious-based charity or not.