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Across Europe, bankrupt municipalities are looking for new sources of revenue and some are eyeing the Catholic Church. In Spain, the church is the country's largest and richest landowner, but its non-profit status means it's exempt from paying most taxes. Lauren Frayer takes us now to a college town near Madrid that's trying to change that.

LAUREN FRAYER, BYLINE: Off a cobblestone street in Alcala de Henares, an ancient Roman town about 20 miles from Madrid, there is a 400-year-old convent, El Convento de Clarisas de San Diego. If you ring the doorbell, one of the nuns calls out from behind a wooden shutter.

UNIDENTIFIED WOMAN: Ave Maria Purissima.

FRAYER: Ave Maria Purissima, Holy Mary, the most pure, she yells, by way of answering the bell. Then, you place your order.

UNIDENTIFIED MAN: (Foreign language spoken)

FRAYER: Good afternoon, this customer says. May I have four boxes of roasted almonds, please?

UNIDENTIFIED WOMAN: (Foreign language spoken)

FRAYER: That'll be 19 euros - about $25 - the nun says, shoving four delicately wrapped almond tins through a turnstile. In addition to prayer and charity, the nuns here run a side business selling candied almonds from this tiny window in their convent. Their vow of chastity means they cannot be seen in public, so they sell their goodies through a rotating wooden screen.

The nuns' profits from their almond enterprise are probably meager, but that's beside the point, say some local lawmakers. The nuns are using at least part of this convent for commercial purposes, and for that, they must pay.

COUNCILMAN ANSELMO AVENDANO: (Through Translator) We're studying whether any church properties that have been long listed as charities are actually being used for commercial activities. If that's the case, they'll have to start paying tax.

FRAYER: City Councilman Anselmo Avendano passed a motion last summer to re-evaluate church holdings by square footage. So if one out of 30 rooms in a convent is selling sweets, it'll have to pay tax on that one room. That's how the system is supposed to work already, but it's not always enforced. Alcala's campaign has ruffled feathers on high.

PRIME MINISTER MARIANO RAJOY: (Foreign language spoken)

FRAYER: I insist we will not denounce an international agreement. It would be irresponsible, Prime Minister Mariano Rajoy told reporters last year. He says any efforts to press the church for more tax violate a 1979 treaty with the Vatican. On one side of this disagreement are cash-strapped municipalities and on the other, centuries of tradition. Councilman Avendano says he's a Catholic himself.

AVENDANO: (Through Translator) We're not questioning the church's good works: charity for the elderly or poor or ill. We're not criticizing that at all. What we want is to re-examine property the church uses to make a profit. For example, rental apartments, parking lots and garages that it owns. Those are businesses.

FRAYER: The Catholic Church owns about half of this city. Sometimes people die and leave their house or business to the church, which then becomes the landlord. Another councilman, Ricardo Rubio, takes me on a walking tour of church holdings in town.

COUNCILMAN RICARDO RUBIO ALCALA DE HENARES: (Through Translators) Some of the Catholic schools have swimming pools, and they charge a fee to area residents to swim there on weekends. So the school should be paying tax on that activity. But they haven't been.

FRAYER: Incidentally, we're walking down Calle Tercio, One-Third Street. The name dates back to the Middle Ages when vendors here were required to give one-third of their profits to the Catholic Church. Nowadays, there's a different tax man in town who happens to be broke. The city of Alcala de Henares is $400 million in debt.

Meanwhile, if the Catholic Church had to pay tax on all its property in Spain, it could owe up to $4 billion a year. Juanjo Pico, a spokesman for Europa Laica, a Spanish group that lobbies for the separation of church and state.

JUANJO PICO: (Through Translator) These days, towns are cutting their budgets for health care, education, infrastructure and welfare. But the Catholic Church hasn't had to make a single cut because it gets money from the state.

FRAYER: When Spaniards file their tax returns, they can check a box to donate money to the church and the state deducts it automatically. That and the church's tax breaks are coming under scrutiny. But church officials question why this seems to be only about them.

FERNANDO GIMENEZ BARRIOCANAL: (Through Translator) Why isn't this debate about all non-profit groups?

FRAYER: Fernando Gimenez Barriocanal is the financial director at Spain's Council of Bishops. He says the church has the same tax deal as the Red Cross and other NGOs. He also hints at what could happen if the Catholic Church were to have to pay more.

BARRIOCANAL: (Through Translator) Obviously, we'd have to direct more of our money to pay those taxes. The church would still want to help those in need, but we'd have less money to do that.

FRAYER: The church may be Spain's biggest landowner, but it's also the biggest charity here, at a time when public welfare programs are being cut and unemployment tops 26 percent. The Alcala town council aims to complete its land survey by the end of the year and possibly serve the Catholic Church with a slightly updated tax bill. For NPR News, I'm Lauren Frayer, in Madrid.

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