On June 5, 2025, the U.S. Supreme Court (Court) ruled in a unanimous opinion that the Wisconsin Supreme Court violated the First Amendment of the United States Constitution by denying the Catholic Charities Bureau an exemption from the state's unemployment tax because the organization did not proselytize or provide services exclusively to Catholics, based on its religious doctrine.

Background

The case, Catholic Charities Bureau, Inc. v. Wisconsin Labor and Industry Review Commission, No. 24-154 (June 5, 2025), concerned a Wisconsin law that exempts certain religious organizations from paying unemployment compensation taxes, specifically those "operated primarily for religious purposes." The Catholic Charities Bureau (Catholic Charities) claimed it qualified for the exemption because its operations were under the control of the Roman Catholic Diocese of Superior, Wisconsin.

The Wisconsin Supreme Court upheld a state agency's denial of Catholic Charities' exemption request, concluding that Catholic Charities was not "operated primarily for religious purposes" because it did not engage in proselytization or limit its charitable services to Catholics. Catholic Charities appealed, arguing that the state's application of the law violated the First Amendment's guarantee of religious freedom.

The US Supreme Court ruled that the Wisconsin Supreme Court's application of the law violated the First Amendment, emphasizing the necessity of government neutrality in religious matters.

Analysis and holding

The Court's decision hinged on the interpretation of the First Amendment's Establishment Clause, which mandates that the government must remain neutral among religions. Justice Sonia Sotomayor, writing for the Court, articulated that the Wisconsin Supreme Court's ruling imposed a denominational preference by differentiating between religious organizations based on their theological beliefs or practices. The Supreme Court found that this preference was unconstitutional, as it did not meet the strict scrutiny standard that requires any law favoring one religion over another to be the least restrictive means to achieve a compelling government interest.

The Court identified the Wisconsin Supreme Court's inquiry into whether Catholic Charities was "operated primarily for religious purposes" as fundamentally flawed, noting the state effectively required Catholic Charities to engage in proselytization or limit its services to Catholics to qualify for the exemption. The Court ruled that such requirements favor the practices of some religions over others in violation of the First Amendment.

The Court also scrutinized the state's justification for its application of the law, which included ensuring unemployment coverage for citizens and avoiding entanglement with religious doctrine. The justices found that the state failed to demonstrate how the theological distinctions drawn by the state were narrowly tailored to achieve these interests.

Implications

The U.S. Supreme Court did not hold that the Wisconsin state unemployment compensation tax exemption was unconstitutional. Thus, the Court's decision does not affect the constitutionality or validity of state unemployment compensation tax exemptions for religious organizations.

Rather, the U.S. Supreme Court held that the Wisconsin Supreme Court's particular application of its unemployment compensation tax exemption law to Catholic Charities — rather than the law itself — violated the Establishment Clause, because it discriminated against Catholic Charities based on religious belief or practice.

The Wisconsin Supreme Court acknowledged that Catholic Charities was a religious organization, controlled by a church, and that its charitable works were religiously motivated. The U.S. Supreme Court suggests in its opinion that those facts were sufficient for Catholic Charities to qualify for unemployment compensation tax exemption under Wisconsin law. Organizations that have or are currently seeking a state tax exemption on the basis of religion should ensure that the religious beliefs and motivations underlying their practices are memorialized in their organizing documents, mission statements, and policies, to support their position and protect against states claiming a lack of religious character or motivation.

Religious organizations with questions about whether they are covered employers under the unemployment insurance laws of their states should reach out to an experienced employment tax advisor.

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