Day #083: The Constitution, surprising powers, and property tax exemptions

Property taxes, and exemptions from them, are powerful forces that can distort, create, and destroy.

Inspired by Michael Bierut’s 100 Day Project, 100 Days to a Better RVA strives to introduce and investigate unique ideas to improving the city of Richmond. View the entire project here and the intro here.

  • Idea: End the moratorium on exemptions by designation, and start charging service fees on exempted private properties.
  • Difficulty:5 — This is a philosophical argument aimed at expanding the discourse over a complicated topic. The political capital lost from these changes probably isn’t practical, but changes don’t happen in the Supreme Court without individuals, institutions, and government created cases that reframe problems in a complicated society.

The United States of America is in serious need of tax reform. Most of the required changes deal with the income tax and capital gains taxes which are at the federal level, but state and local reform are also necessary. Richmond should end the moratorium on exemptions by designation and start charging service fees to exempt institutions.

There are two ways to be exempted from property taxes in the state of Virginia: classification or designation. State law mandates that municipalities exempt certain properties by classification for being government buildings, places of worship, residencies of ministers, public libraries, institutions of learning, or public hospitals. The state also grants municipalities the power to exempt organizations by designation, but since February 20131 the city has had a moratorium on that process.

Property taxes, and exemptions from them, are powerful forces that can distort,2 create, and destroy. For designated institutions, it is a rich privilege. For everyone else, it is a closed system. Exemptions on public buildings are mostly administrative. The government isn’t going to tax the government, which leaves two and half exemptions that are unlike all the others: places of worship, residencies of ministers, and private institutions of learning.

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Any discussion of religious property tax exemptions has to start with the First Amendment. It was the backbone of the landmark Walz v. Tax Commission of the City of New York which established the status quo. The Establishment Clause is regularly judged by the Supreme Court on the metrics of neutrality and voluntarism.

Neutrality focuses on the equal protection of laws and says government should not favor religion over non religion or any sect over another sect. Contrary to the majority opinion in Walz v. TCNYC, religious property tax exemptions fall short on neutrality. Religion is no longer a binary classification, it is a spectrum. Attempting to put the varied belief systems of 2014 into a bucket for religion and a bucket for not religion is an impossible task. When turning a spectrum into a binary classification of exempt and not exempt, a line has to be drawn that will unquestionably violate the concept of neutrality.

In Wal v. TCNYC, the majority opinion also claims voluntarism isn’t violated because “this legislation neither encourages nor discourages participation in religious life.” Defenders of the exemption claim it isn’t a subsidy because the government isn’t directly writing a check.

By definition, subsidies can be financial or in-kind support. Richmond provides millions of dollars of fire and police protection, roads, and other in-kind services to places of worship at the expense of other tax payers who are in turn supporting religious endeavors and the mandate of the government.

Ultimately, the exemptions prioritize the freedom of religion over other parts of the First Amendment. If “the power to tax is the power to destroy” as claimed in McCulloch v. Maryland (1819) then almost any government action on individuals or institutions could justify a tax exemption. This is not practical. Focusing on the just and equal taxation of institutions would be a far more level-handed approach that is neutral and voluntary.

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The best system would get rid of designation by classification for all non-government buildings and force everyone to work through a system of designation. This would motivate places of worship to expand charitable actions and would punish the few anecdotal exceptions of ministers with multi-million dollar parsonages and luxury cars. It would encourage institutions of education to build libraries which create positive externalities over stadiums that don’t generate education or social benefit.

Richmond can’t change a forty four year old Supreme Court ruling and they can’t change state or federal law, but the city has a surprising amount of power to build a system that not only covers the cost of city services but limits the flawed favoritism perpetuated by the status quo.

Richmond should end the moratorium on exemption by designation and create a five person group to review cases. The standards should be strict and focus on creating tangible social benefits like education, research, and support for the disadvantaged.

Part of the justification for the moratorium was the cost of foregone tax revenue. Per the power granted by § 58.1-3400, Richmond should create a service charge that includes the cost of fire and police protection. This should be applied to all places with designation of exemption as well as places of worship, houses of ministers, and institutions of higher education.

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It is tough to justify in-kind subsidies for private institutions with exemption by classification paired with a moratorium on exemption by designation. The city’s ability to charge service fees to mitigate the losses of expanding exemptions means there is a financially responsible and legal way to reward non-profits for creating tangible, social benefits for Richmond while embracing a more contemporary view of the First Amendment.

Love this idea? Think it’s terrible? Have one that’s ten times better? Head over to the 100 Days to a Better RVA Facebook page and join in the conversation.

Photo by: suttonhoo

  1. After a five year moratorium, the city briefly ended the moratorium in 2012 in a failed attempt to grant the Byrd Foundation an exemption. 
  2. Economics Sidebar: By reducing the cost of capital but keeping the cost of labor the same, the government is reducing the cost of capital relative to labor, which encourages firms to substitute away from labor toward capital. So maybe the government is encouraging the Red Cross to buy another SUV instead of hiring a new employee or a church to build a new chapel instead of hiring a minister of pastoral care. 
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Aaron Williams

Aaron Williams loves music, basketball (follow @rvaramnews!), family, learning, and barbecue sauce.

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