Supreme Court Tells States to Question Regulations—Not Religions

Line drawing is inherent in the legislative and regulatory processes, especially when administering state and federal tax codes. Taxpayers who are denied exemptions often seek relief in the courts, and the courts then test the text with a constitutional yardstick.

That’s exactly what happened when the Wisconsin Supreme Court denied the Diocese of Superior’s Catholic Charities Bureau a state unemployment tax exemption. But a unanimous US Supreme Court held that denying a religious unemployment tax exemption was unconstitutional under the First Amendment’s Religion Clauses.

The June 5 ruling in Catholic Charities Bureau v. Wisconsin Labor & Industry Review Commission may prompt assessments of similar limitations of legislative and regulatory language around the country to see whether the grounds for exemption that invalidated Wisconsin’s rule raise similar potentially unconstitutional trampling by a state on the church’s ground.

Although the Charities Bureau advanced three different arguments about unconstitutionality, the court needed to address only one: whether state regulators’ application of the exemption—which the Wisconsin Supreme Court upheld by a 4-3 vote—was discrimination “among religions” that didn’t survive strict scrutiny.

The text of Wisconsin’s unemployment tax exemption mirrors that of the federal unemployment tax statute. The statute limits a religious exemption to entities that either are a church or (if not a church) are “operated primarily for religious purposes” and controlled, supervised, or operated in connection with a church.

The Charities Bureau isn’t a church, but there was no dispute that the Charities Bureau operated under the supervision of the diocese, considered a “church” and subject to the bishop’s oversight.

Instead, the question turned on whether the Charities Bureau is “operated primarily [the statute does not say ‘exclusively’] for religious purposes.” The state court’s majority opinion agreed with Wisconsin regulators that the Charities Bureau wasn’t operated primarily for religious purposes because its delivery of social services lacked religious content.

Staff and administrators, for example, didn’t proselytize recipients or accompany delivery of food with prayer or other liturgical acts. The Charities Bureau made plain that doing so wouldn’t have been consonant with Catholic Church teaching.

As the case was framed, the Charities Bureau “could qualify for the exemption while providing their current charitable services if they engaged in proselytization or limited their services to fellow Catholics.” That frame, the US Supreme Court held, was a “paradigmatic form of denominational discrimination” and violated both Religion Clauses under settled case law, including Larson v. Valente.

Although the effects are being felt in Wisconsin, the idea that legislatures don’t intend religious exemptions to be open-ended isn’t new. Some state laws requiring provision of preventive services—including California Health and Safety Code Section 1367.25(c) and the federal Patient Protection and Affordable Care Act—initially limited a religious exemption to those entities that met a four-part test.

An exempt religious organization was defined as one for which the inculcation of religious values was its purpose (not just its primary purpose), performed in service to an insular religious community with a workforce that was primarily made of co-religionists, and which doesn’t file an IRS Form 990 information return.

Exempting houses of worship and religious schools—and regulating the public-serving charities agencies such as hospitals, universities, and social services agencies—was the original intention.

The constitutionality of the required scope of the religious employer exemption was never settled by the US Supreme Court. Alternating presidential administrations have revoked, then imposed, and now presumably may again revoke aspects of what remains of that limitation.

Notwithstanding the unanimous ruling in the Wisconsin case, the extent to which regulators may permissibly classify among religious actors for purposes of regulating or exempting will endure.

One certain approach is implicit in the court’s opinion, again with reference to precedent. Presumably, a regulator could apply “‘secular criteria’ that ‘happen to have a disparate impact upon different religious organizations,’” the court said, quoting Larson.

Larson offers little concrete guidance other than that the statute in question there wasn’t religiously neutral and was intended to discriminate. But the rule applied by the court would require that classification to be religiously neutral and not enmesh regulators in second-guessing religious judgments and practices to decide which are primary and which aren’t.

Given the court’s willingness to overturn state efforts to limit religious participation in public programs and exemptions, until the court draws—and explains—a firm boundary between church and state, we are likely to see more challenges to those limitations in the foreseeable future.

The case is Cath. Charities Bureau, Inc. v. Wis. Lab. & Indus. Rev. Comm’n, 2025 BL 193781, U.S., 24-154., 6/5/25

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mark E. Chopko is senior counsel at Stradley Ronon Stevens & Young in Washington, D.C., and chair emeritus of the firm’s religious, educational, and nonprofit organizations practice.

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