Sunday, December 21, 2014

Calm down about church tax exemption numbers

A 2012 study that calculated the totality of tax breaks American churches receive each year is making the rounds again in my social circle, and once again people are using it to make simplistic assumptions, such as that church tax exemptions are costing America X each year.

The actual study reported $71 billion annually, but openly left out some factors. Washington Post-turned-Vox contributor Dylan Matthews tacked on tax exemptions for religious donations to bring the number up to $82.5 billion.

Matthews also mentioned another hidden cost:

Of course, these subsidies do more than reduce revenue. Property tax exemptions, in particular, distort real estate construction decisions and allocate more land to religious entities than would otherwise be the case, which drives up rents for everyone else (especially since religious groups tend not to buy property in high-density, skyscraper-style developments and instead get a whole lot of land for themselves).

Well, it goes the other way too. I'm reminded of something Scott Sumner wrote earlier this year, that economics is not accounting. The 2012 study was published by the humanist Free Inquiry, a publication with an ax to grind and not known for having talented economists on hand to evaluate papers, and it was authored by a sociologist - a discipline I believe tends to gloss over important economic concepts.

The authors of the report listed the $71 billion figure as "subsidies" and while I generally disagree with labeling tax breaks as subsidies, I'm willing to let it go. The main issue I have is with other people interpreting this figure as a measure of what churches would have paid in taxes had it not been for the tax exemption.

That is to say, we shouldn't assume that a change in the tax laws would not be met with changes in human behavior. This is called static forecasting and it's problematic. It assumes, for example, that church leaders would not find tax shelters, would not register as another type of non-profit organization, would not close down churches, would not move to smaller properties, or any other form of rational responses to a new spike in their annual expenses.

In Dylan Matthews' addition, it assumes that people wouldn't donate to other causes once the tax break is gone.

The aggravation gets worse when people try to claim specific things the money could be spent on, such as this post saying it could have gone to funding food stamps. They are assuming that all of the money would have gone to the federal government, even though the study authors were clear that some of the breaks were for state and municipal taxes.

I don't have a problem with religious tax exemptions, as they resemble non-profits a lot more than they resemble for-profit organizations. I am also willing to listen to arguments about why the tax exemptions should be removed. That being said, advocates of the idea need to come up with a dynamic forecasting model before they try to tell me what the actual tax revenue would be.

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