Last week a federal judge ruled that the long standing practice of churches (and synagoges, mosques, dioceses, etc.) giving their pastors a housing allowance was unconstitutional. This story is likely to pick up steam in the media, and my experience with this topic is that most people (including many elders and pastors) have no idea how housing allowances work, or why they are there to begin with. So here are some FAQ’s about housing allowances and the recent ruling striking them down: What is a housing allowance:There are two ways pastors are paid housing allowances. Some churches have a parsonage (a house for the pastor owned by the church), and the pastor lives in that. Other churches simply pay the pastor a housing allowance as part of his salary. So, if a pastor earns $80k a year, he could designate that $50k (or whatever) of that as a “housing allowance.” That’s helpful to know, because if you hear of a pastor with a $50k housing allowance, that does not mean that he spends that much a year on his house. He could have, conceivably, designated his entire salary to be toward housing.How is this taxed?Pastors do not pay income tax on the amount that they actually spend on their housing. So if a pastor designates $50k as housing allowance, but only spends $20k on his housing, then he does pay income tax on that other $30k (and will probably be fined on the IRS for not withholding enough to begin with—so I’ve heard).But pastors do pay social security tax on their whole salary (including housing allowance, or the rental value of the parsonage if they live in one).  So while the housing allowance is a form of tax relief, this year the self-employment social security tax is 15%, so its not as big of a tax relief as some people make it out to be.Why do pastors get a housing allowance tax exemption from the IRS?The history of the housing allowance tax-exemption is long and convoluted. Going back to the NT time, Israel had its own currency and financial system in the temple that remained out of reach of Roman taxation. It the middle ages, the Catholic Church owned huge swaths of land through out Europe—and particularly in England, whose law structure the US more or less adopted—that were exempt from taxation.When the United States began, most pastors lived in church-owned parsonages, and the US carried over the common European practice of not taxing that as income. Imagine the pastor of a small church in the 1790’s who lived in a parsonage and was paid meagerly by his small congregation—now imagine the government telling him that not only did he have to pay taxes on his salary, but also on the rental value of his parsonage, as if that were income too. That would have been a fairly unreasonable burden on those churches, and completely unheard of in Europe. It also would have shown considerable favoritism to those pastors connected to wealthy denominations back in Europe.Over time, most pastors left the parsonage behind. The result is that by limiting the tax exemption to parsonages, the government was actually showing favoritism to established religions (and particularly historic denominations who generally owned parsonages). The government corrected this favoritism by allowing every religion/denomination to give their pastors a housing allowance income-tax free.Short answer: it would be unreasonable to tax parsonages as income, and it would be showing favoritism to limit the housing allowance to only parsonages.Are pastors the only ones who get this?Sort of. There are analogous careers when it comes to this tax. For example, soldiers don’t pay tax on the value of their housing while they are active duty. A college professor who is asked to live on campus is not taxed on the rental value of his dorm room. Some employees that are required by their employer to live in certain housing are not taxed on that housing as if it were income. But those analogies all aren’t exactly like pastors.Yet that is because of the unique roll of religion in public life. Nothing else is really like it. No other institution has such strict freedoms ingrained in the constitution. Which leads to:I believe in the separation of church and state—so should pastors get a housing allowance? Isn’t that the government helping establish a church?Well as Joe Carter pointed out Monday, the opposite is true—the housing allowance tax exception keeps the government out of religion. Here is why:The act of taxing is intentionally intrusive by the government. It is arguably the most intrusive thing the government does to someone. In our country, the government decided early on that less intrusion into religious life is better than over intrusion. So people make their money, pay taxes on their salary, and give some of their money to their church for its mission. The government has decided that taxing everything the pastor is paid by his congregation—including his housing—is too much interference with the church. But at the same time, they have decided that not taxing the pastor at all shows too much deference to religion. The solution, which has been around (as I noted earlier) from at least the middle-ages has been to tax the pastor’s salary but not his housing.The judge’s ruling allowed the parsonage exemption to stand, but struck down the exemption only for those pastors who don’t live in on the grounds of the church, which is manifestly prejudicial against certain denominations and religions and certainly creates an unequal obstacle to church plants and new places of worship.If the judge’s ruling stands, it would not be the end of the world. But it would be a huge blow against smaller churches and smaller religions. It would give a huge financial boon to historic denominational churches and Roman Catholicism, because they generally use parsonages. It would be all the harder to plant a church (you’d have to buy a building for the church and for the pastor) and would entangle the government even more and more into what churches can count as housing and what they can’t.Was the judge’s ruling more evidence of the decline of religious freedom in the US?Its hard to overlook the fact that the judge who issued the ruling is the same judge who declared the National Day of Prayer unconstitutional (she was overturned on appeal). Its also noticeable that the case she heard was absurdly staged. It was brought by the Freedom From Religious Foundation, who after having sued the IRS, then started paying some of their own workers a housing allowance as if they were pastors. This was designed to get the IRS to tell them that they can’t do that, and the IRS obliged. Thus they were able to tell the judge that they had standing to sue because their workers were not allowed the same tax benefit that pastors receive. The whole suit was fabricated, and to call it malarkey is to give it too much credit.But with that said, this has been brewing for a long time. As the rules on housing allowances have gotten stretched further and further, they have been abused more and more. In the news recently was Stephen Furtick’s new house, to give just one example of how far some pastors have gone from the parsonage model.Beyond that, there is the curious case of Church of Christ—a denomination without pastors altogether. But rather than take that as a theological conviction that would eliminate them from the housing allowance exemption, it instead it created a situation where anyone who works for the denomination can claim the exemption (even basketball coaches, as this article points out).Obviously the allowance has expanded beyond its historical intent. In the era of mega-churches, the norm now is that dozens and dozens of people on a church staff receive housing allowances. Its hard to imagine a case of a church owning dozens and dozens of parsonages (or one for the basketball coach!). Churches aren’t wrong to take this exemption for everyone who is a “minister” (the law’s word). After all, if it is available, why not take it? Well the answer to that question is simply: the more the exemption is expanded, the more certain its abolition becomes.Is the tax exemption a good idea?I think the housing allowance exemption for pastors is a good idea and should be maintained (but obviously I have a dog in this fight). The less the government regulates the inner workings of churches the better. If it is allowed to stand, the ruling that invalidated the housing allowance exemption for pastors will have the effect of the government showing favoritism to Catholic Churches and historic denominations, and that cannot be allowed to stand. Beyond that, there are exemptions for military, for companies who have their employees live on site, etc., and it makes no sense to say that only churches cannot be the recipients of that kind of exemption. Thus the current system, even with its abuses, is preferable to a system where the government becomes more entangled in the business of churches.The truth is, this is difficult area of tax law. The government needs to tax, but also in a democracy wants to stay out of hindering or interfering with a particular church or religion. The result of these two tensions is our current system.What do you think? Is the housing allowance exemption fair? Is it a good idea to continue it?