The Supreme Court's legacy on church-state relations is a mixed one. In the last half century, the Court's decisions on 1st Amendment religious freedoms have seemed both to endorse public actions in apparent support of religion (see Everson, 1947, and Yoder, 1972), and to reject them, striking down actions that have breached the "wall of separation between church and state" (see Engel, 1962, Schempp, 1963, and Lemon, 1971). Prayer in public schools was declared unconstitutional, as were some—but by no means all—forms of State aid to parochial schools. Meanwhile, the Court maintained a vigilant watch over guarantees of religious freedom. Throughout, the Court consistently avoided setting hard-and-fast rules about issues relating to church and state.
Like the Federal Tax Code, the tax laws of the State of New York provided tax-exempt status for property belonging to nonprofit associations or corporations that was "used exclusively for religious, educational or charitable" purposes. Walz, a New York attorney and self-professed Christian who belonged to no particular church, owned a 22-by-29-foot plot of land on Staten Island. The City of New York assessed its value at $100 and levied on Walz a property tax of $5.24 per year. Walz contended that a double standard existed and requested an injunction to prevent tax-exempt status for churches and church property. Paying his own taxes while religious properties were tax-exempt, Walz argued, forced him to support or subsidize churches. He claimed that indirect support violated the 1st Amendment guarantees against the establishment of a religion by the State and, because it forced him to support churches he did not belong to, it also violated his Free Exercise rights. The New York courts rejected these arguments, and Walz appealed to the federal courts.
The case addressed both the Establishment and the Free Exercise clauses of the 1st Amendment. Does the tax-exempt status of churches and their property require all citizens who pay taxes to support churches, in violation of the Establishment Clause? Does paying taxes, which indirectly support churches through their tax-exempt status, violate an individual's Free Exercise rights?
For Walz: Requiring all property owners to pay taxes on their property while church property remains exempt from taxation constitutes public support for religious institutions that the State has essentially "established," in clear violation of the 1st Amendment. Furthermore, since property taxes are used to support churches through tax breaks, property taxpayers in effect are subsidizing these churches, in violation of the Free Exercise clause. This tax-exempt status also creates an "excessive entanglement" of church and state, violating the "wall of separation" between the two that the Court has recognized in many previous decisions. Lastly, although tax legislation may not intend to support one or all religions, that is its effect, and the effect is just as important as the intent.
For the Tax Commission of New York City: The existence of churches serves the public interest and the public welfare. Because of their contribution to the public good, they are entitled to the minimal support offered by a tax-exempt status. More importantly, if churches were taxed, the government would then be "excessively entangled" with religious institutions. Through the tax codes, the government would necessarily establish some type of economic regulation of religion, and this kind of control would inhibit the free exercise rights guaranteed by the 1st Amendment.
By a 7–1 vote, the Court voted to uphold the tax-exempt status of churches. Chief Justice Warren Burger wrote the majority opinion, which began by noting that "The Establishment and Free Exercise clauses of the First Amendment are not the most precisely drawn portions of the Constitution." Burger reviewed some of the Court's previous struggles to define those clauses and found "considerable internal inconsistency" in the court's opinions. These inconsistencies resulted from trying to formulate "general principles on a case-by-case basis." Nonetheless, a general disposition on religion was discernable; namely, that the state should be "neutral" with regard to religion. Conceding the difficulty of that disposition, Burger noted that "The course of constitutional neutrality in this area cannot be an absolutely straight line; rigidity could well defeat the basic purpose" of the Establishment and Free Exercise clauses, "which is to insure that no religion be sponsored nor favored, none commanded, and none inhibited." It was "'a tight rope,'" as Burger put it, but one the Court had "successfully traversed."
Burger then analyzed both the intent and the effect of tax-exempt laws and found that the "purpose of property tax exemption is neither the advancement nor the inhibition of religion; it is neither sponsorship nor hostility," but neutrality. In regard to the effects of tax exemption, Burger declared, "We must also be sure that the end result—the effect—is not an excessive entanglement with religion. The test is inescapably one of degree. Either course, taxation of churches or exemption, occasions some degree of involvement with religion."
In a lone dissent, Justice William O. Douglas drew a distinction between churches and other nonprofit organizations that are tax-exempt. He suggested that other organizations provided for the public welfare in ways that the government could, but chose not to, while the government is actually forbidden from supplying or organizing any types of religious worship. "That is a major difference between churches on the one hand and the rest of the nonprofit organizations on the other," Douglas wrote. "Government could provide or finance operas, hospitals, historical societies, and all the rest because they represent social welfare programs within the reach of the police power. In contrast, government may not provide or finance worship because of the Establishment Clause any more than it may single out 'atheistic' or 'agnostic' centers or groups and create or finance them."