If Italy Can Do It ...

by Luis Granados

Last month’s headlines certainly looked exciting: “Italian church to be stripped of tax exemption,” “Catholic church to lose historic property tax exemption in Italy.” Wow! If such a heavily Catholic country like Italy can start making God experts pay property taxes like everyone else, then why can’t even less-Catholic countries – like this one – do the same thing?

Unfortunately, it turns out that the headline writers were doing their job: sensationalizing a story to make suckers like me take the time to read it, misleading without being technically inaccurate. The Italian church is not losing its entire tax exemption, just part of it – a part that largely doesn’t exist here, or in most other jurisdictions. Still, progress is progress, and it’s worth understanding exactly what is going on in Italy.

A church, operating as a church, was and will remain exempt from all Italian property taxes, even though it benefits from all the police, fire, transportation, environmental protection, dispute resolution, and other services that property taxes pay for. So will a convent, a monastery, a seminary, or any other location owned by a church. Everyone else, religious or otherwise, pays a little more so that the church can avoid paying its proportionate share.

In Italy, this bad situation is even worse, because since the days of Mussolini the Catholic Church has had far more money than it knows what to do with. So it has used some of that money to buy up vast chunks of Italian real estate, and use it for strictly commercial purposes. By one estimate, the church owns some 50,000 buildings in Italy, more than half of them of a commercial nature. Fifteen percent of Italy’s tourist lodgings are church owned.

That’s what the current controversy is about. If the church owns a hotel, for example, it pays no property tax. Meanwhile, the hotel across the street, owned by ordinary Italians trying to make a living, pays property tax not only for itself, but a little more to cover what the church isn’t paying.

To be fair, that’s an overstatement. Italian law provides that a 100% commercial-use property would be subject to property tax even if owned by a church. The issue involved mixed-use property, with some religious elements and some commercial elements, which under Italian law is entirely exempt from property tax.

So if you take that 100% commercial-use hotel and stick a little chapel in the corner, then voila! It’s now mixed-use, and entirely tax exempt. It doesn’t take much imagination to guess what you’ll find in most church-owned property in Italy.

Competing business owners have complained about this for a long time, and when no one in the Italian government paid attention they took their case to Europe. The EU has been putting the squeeze on Italy for a while now, and the current prime minister – a no-nonsense economist trying to pull the government back from the brink of a bankruptcy that would surely trigger a world depression – is probably grateful that he can use EU pressure as his excuse for ending this tax scam. By some estimates, curtailing the mixed-use exemption will net the Italian government as much as two billion euros a year.

There is a sweet irony in the fact that church tax exemptions are being scaled back in Italy, because Italy is the original home of the whole sordid idea. It was the Roman Emperor Constantine, back in the fourth century, who dreamed it up:

Since it appears from many circumstances that, when religion is despised, in which is preserved the chief reverence for the most holy celestial power, great dangers are brought upon public affairs; but that when legally adopted and observed, it affords the most signal prosperity to the Roman name and remarkable felicity to all affairs of men, through the divine beneficence – it has seemed good to me, … that those men who give their services with due sanctity and with constant observance to this law, to the worship of divine religion, should receive recompense for their labors. Wherefore it is my will that those within the province entrusted to thee, in the Catholic Church, over which Caecilianus presides, who give their services to this holy religion, and who are commonly called clergymen, be entirely exempted from all public duties, that they may not by any error or sacrilegious negligence be drawn away from the service due the Deity, but may devote themselves without any hindrance to their own law. For it seems that when they show greatest reverence to the Deity, the largest benefits accrue to the State.

By Constantine’s own logic, it’s time for the tax exemption to go. Its purpose was to attract “signal prosperity” and “divine beneficence” to the state, as sort of a bribe to God. Manifestly, this isn’t working anymore, as evidenced by the fact that the Italian state is broke. Why pay for “signal prosperity” you’re not getting?

Here in the United States, for the most part, a commercial enterprise owned by a church will not be tax exempt, even if the church tries a “mixed-use” ploy like it’s been able to get away with in Italy. Still, what’s interesting about the Italian situation is that the argument used to achieve the desired result was essentially one of fair competition, brought by the EU antitrust division – the same folks who slapped a billion-euro fine on Microsoft in 2007 – rather than an explicitly anti-religious argument.

The same equal protection argument can be used for lots of other subsidies the church receives. For example, the Vatican does not pay the value-added tax (VAT) on its purchases, like every other business does. It pays a corporate income tax rate exactly half that of other businesses. It gets the benefit of 650 million euros per year in the form of state-paid “religious education” teachers, that other businesses do not get. It even gets every drop of water it uses supplied by the Italian taxpayers, absolutely free. No wonder little 108-acre Vatican City sports over 100 fountains!

The wonder is not that Italy is broke; the wonder is that it’s stayed solvent as long as it has.

Then there’s the otto per mille, or “eight per thousand,” the odd arrangement in which Italian taxpayers can choose to direct 0.8% of their tax payments either to a church of their choice, or to the government. In recent years, only 34% of Italians have requested that their money go to the Catholic Church – yet it rakes in 87% of the funds collected. Why? Because if you don’t specify a destination, then your 0.8% is allotted in the same proportion as dictated by those who do. The large majority of Italian taxpayers view this the same way I might. They don’t want to specify any religion because they don’t believe in any religion. They sure don’t want their money going to the crooks in the government, so they just leave it blank. The church then laughs all the way to the bank. The bishops devote only about 20% of this money to charity, and 35% of it to their own salaries. If there were truly a level playing field, taxpayers would be able to direct this money to any charity, not just to any religion.

The normal justification for all these subsidies is that religion provides mental comfort to its customers. Well, so do psychologists, with more measurable rates of success. If the object of the regulators is to assure even-handed competition, then why should the government favor one mental comfort-providing business over another? Why shouldn’t psychologists get the same subsidies and tax breaks the church gets? Not that psychologists are the only mental comfort providers. For some of us, bartenders provide mental comfort as well. So do musicians, especially of the quieter cool jazz and classical variety. If providing mental comfort qualifies one for subsidies, why not the same subsidies for bartenders and guitarists?