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Wisconsin Violates First Amendment in Denying Tax Exemption to Catholic Charities, U.S. Supreme Court Holds

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In a unanimous decision, the U.S. Supreme Court ruled in Catholic Charities Bureau, Inc. v. Wisconsin Labor & Industry Review Commission that Wisconsin's denial of an unemployment tax exemption to Catholic Charities Bureau, Inc. (CCB) and its affiliates violates the First Amendment.

The dispute began nearly a decade ago when the Catholic Charities Bureau for the Diocese of Superior, located in northwestern Wisconsin, sought an exemption from the State’s unemployment tax. Wisconsin law requires employers to pay into a fund that provides unemployment benefits to workers who lose their jobs; however, it exempts religious organizations from this requirement. Under Wisconsin Statute §108.02(15)(h)(2), the exemption applies to nonprofit organizations that are both “operated primarily for religious purposes” and “operated, supervised, controlled, or principally supported by a church.”

Catholic Charities Bureau, Inc., along with four of its sub-entities, operate under the auspices of the Roman Catholic Diocese of Superior, Wisconsin. These organizations provide various social services, including assistance to individuals with disabilities, without engaging in “proselytization” or “restricting services to Catholics.” CCB argued that because it conducts its charitable work as “an expression of Catholic values,” it fell within a provision of the tax law that carves out from the definition of “employment” anyone who works for an organization “operated primarily for religious purposes.”

A state labor commission rejected the group’s bid for the exemption, concluding that even if its motivations were religious, its activities, primarily social services, were secular. In a closely divided 4-3 decision last year, the Wisconsin Supreme Court upheld that determination, reasoning that CCB’s lack of proselytization and its practice of serving individuals regardless of their faith indicated it was “not operated primarily for religious purposes.”

Every single Justice on the U.S. Supreme Court joined together to reverse the decision. Writing for the Court, Justice Sotomayor held that the criteria applied by the Wisconsin Supreme Court “facially differentiates among religions based on inherently theological choices,” violating the constitutional rights of Catholic Charities. The Opinion emphasized that “the First Amendment mandates government neutrality between religions and subjects any state-sponsored denominational preference to strict scrutiny.”

Justice Sotomayor explained that the Wisconsin Supreme Court’s interpretation imposed a “denominational preference” by drawing theological lines between types of religious organizations. The Court found this approach constitutionally impermissible under the First Amendment because it effectively penalized organizations for choosing to express their religious mission through service rather than proselytization. The Court emphasized that eligibility for religious exemptions must not depend on the government making theological judgments. Therefore, the Wisconsin standard was subject to strict scrutiny, a standard the Court found the State had not met. To survive such scrutiny, a law must be justified by a compelling governmental interest and narrowly tailored to advance that interest. The Court found that Wisconsin failed on both fronts.

The ruling carries significant implications for how religious organizations are treated under state and federal law. By rejecting the State’s attempt to categorize certain religious services as “insufficiently religious,” the Court reaffirmed that the government may not draw theological distinctions without running afoul of the First Amendment. The decision applies strict scrutiny to such efforts, setting a high threshold for state actions that burden religious exercise.

Faith-based organizations nationwide have been closely watching this case. The outcome may prompt renewed attention to similar exemption claims, including from religiously affiliated hospitals and universities, which could have broad implications for how states administer unemployment taxes and other regulatory schemes.

If you have any questions about the legal implications of this case or other matters related to First Amendment protections for religious institutions, please contact the attorney with whom you regularly work at Airdo Werwas, LLC, or Michael A. Airdo at mairdo@airdowerwas.com or Felicia Owen at fowen@airdowerwas.com. Grateful recognition is given to Law Clerk Michael P. Jekot, mjekot@airdowerwas.com, soon-to-be law student at Loyola University, whose research and writing aided in the preparation of this Blog.

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