In Defense of the “Church Parking Tax”


Next week, the House Ways and Means Committee plans a hearing on “Ending the TCJA Tax on Houses of Worship, Charities, and Nonprofits.” While this seems alarming, it isn’t. The provision ensures neutrality between tax-exempt organizations and C corporations as it relates to employee fringe benefits. Without it, not-for-profit employers could offer benefits at a lower cost than their for-profit counterparts, granting them an advantage in the hiring process.

The Tax Cuts and Jobs Act (TCJA) requires tax-exempt organizations to report expenses for qualified employee fringe benefits (QFB) as unrelated business taxable income (UBTI). The provision has been dubbed the “church parking tax” because it requires religious institutions to pay a tax for reserving parking spots for employees, among other expenses.

Understanding the rationale for this change requires examining how the TCJA impacted C corporations. The TCJA made numerous changes to the corporate tax structure, including the elimination of the deduction for certain employee benefits, such as employee transportation expenses and on-site athletic facilities, from corporate income. Pre-TCJA, employers could deduct the cost of certain fringe benefits from their taxable income, while employees were not taxed on the value of those benefits, creating a hole in the tax code.

The TCJA broadened the tax base to eliminate the gap. Instead of taxing the value of the benefits for the employee, policymakers opted to deny firms the deduction for benefits provided—a reasonable choice.

However, without making a similar change for tax-exempt entities, a bias would be created. Without the additional provision, the tax bills of not-for-profit institutions would have been unaffected since they have no taxable income to deduct. To solve that, policymakers decided to require nonprofits to tax the value of fringe benefits provided to their employees at 21 percent, by considering it part of their UBTI.

The change means that both corporations and tax-exempt organizations will be taxed at the same rate on expenses related to employee parking, transportation, or on-site athletic facilities.

Intuitively, charging tax-exempt employers for providing certain benefits to their employees feels unfair, sparking heated debate about how the TCJA taxes churches. However, the neutrality of this policy within the tax code is valuable. The tax equalizes the playing field between for-profit and not-for-profit employers.

While compliance may be difficult, the “church parking tax” should not be viewed as a penalty on religious or charitable organizations. It is an important provision that encourages neutrality in both the tax code and the labor market.

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