Lawsuit settled, ending city's strategy to 'tax' tax-exempt churches

A lawsuit by several churches against the city of Magnolia, Texas, for a program that city officials described as their strategy to impose a special tax on the tax-exempt organizations has been settled.

City officials several years ago created a new category for utilities customers of their water system, called “Institutional,” then they multiplied the ordinary rates paid by commercial customers by several times and demanded all churches were in that category and must pay up.

City administration Paul Mendes, at the time, bluntly said, “Implementing an institutional rate would allow the city to collect funds from these entities in place of taxes or other fees.”

The churches, with a bill surge from $385 to $1,071 for one of the churches, charged that was wrong.

Now, lawyers with First Liberty Institute, who had represented Magnolia Bible Church, Magnolia’s First Baptist Church, and Believers Fellowship, have confirmed the city has approved a settlement that will require officials to reclassify the water rate structure and treat “all religious organizations, religious non-profits, churches, or houses of worship” the same as commercial businesses.

In return, the churches will drop their lawsuit that charged the city’s actions were unconstitutional.

“Churches and non-profits provide a multitude of services to their communities, particularly for the most vulnerable,” said Aaron Streett, Partner at Baker Botts, part of the legal church working on behalf of the churches. “This joint agreement will allow both the city and all the religious organizations of Magnolia to build a stronger community.”

“Our clients are thrilled that, because of this agreement, they can turn to what they do best: care for their community in partnership with the city,” said Jeremy Dys, Special Counsel for Litigation and Communications for First Liberty.

The legal battle took nearly three years, and focused on the fact the city was treating religious groups “less favorably” than for-profit businesses.

“We are grateful that churches and all religious organizations in Magnolia will now be treated equally along with area businesses by the city of Magnolia,” said Steve Burrell, senior pastor of Magnolia Bible Church. “We are eager to work with the city council to continue to improve the lives of our friends and neighbors.”

The case erupted when in June 2017 churches in town found their water-sewer system bills doubled or tripled from one month to the next, with no change in usage.

An investigation by Texas Pastor Council revealed that the city had created a brand new category of rates called “Institutional” which charged churches, schools and non-profits higher rates than the commercial rates they had historically paid.

The council confirmed, “Most shocking was that the city admitted they had done so to offset the taxes they weren’t receiving because of the property tax exemption granted by the state of Texas to these entities.”

The city, when confronted about its revenue-raising scheme, refused to budge.

The council then worked with state lawmakers on legislation in 2019 and 2021 to address the inequities, but the plans were denied “in a House committee led by Democrat Tracy King after he refused to allow a vote.”

WND reported when the dispute developed the churches nearly were denied access to the court system in the fight because of another scheme by the city.

When the dispute arose — and church officials were attending public hearings, sending letters, seeking a legislative fix and even providing written notice of a lawsuit — city officials secretly went to court in Austin seeking approval for their scheme.

They got it, barring churches from suing and subjecting them to sanctions if they did, the legal team explained.

However, the churches convinced the court that had approved Magnolia’s scheme to reopen the case.

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This article was originally published by the WND News Center.

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