By Philip Pullella
ROME (Reuters) - Prime Minister Mario Monti, a Catholic crusading to put Italy's economy in order by ending entrenched privileges such as tax breaks, is striking against an unlikely target - his own Church.
Monti's government issued a statement on Wednesday night saying it had informed the European Commission that it would pass a law ending the Church's exemption from local property taxes on its properties used for commercial purposes.
Estimates on how much this can bring to government coffers have ranged from 700 million euros ($908 million) to more than 1 billion euros.
Italy's Church - once an unshakable, and some say untouchable, institution - has come under fire for what some consider unfair privileges at a time Monti has asked Italians to make unprecedented sacrifices as part of a "tears and blood" austerity plan to thwart a Greek-style crisis.
The European Commission in 2010 opened a probe against Italy to determine if tax breaks for some Church properties amounted to illegal state aid and distorted competition.
Some political parties, particularly the tiny, liberal Radical Party, and some intellectual leaders, have led a campaign to strip the Church of tax exemption on properties that are not used exclusively as places of worship.
Throughout Italy, the Church owns many private clinics, hotels, bed and breakfasts and guest houses that enjoy tax exempt status because parts of the structures are occupied by priests or nuns or have a chapel for worship.
That created a grey area where many structures were essentially commercial but covered by the religious exemption law.
The government statement said the proposal to be presented in parliament would limit the tax exemption to structures that are "exclusively non-commercial." It did not say when it would present the bill.
In mixed-use cases, such as hotels run by nuns, the exemption will apply only to the parts of the structures that are non-commercial, such as chapels and residences for priests and nuns, and the statement said the Economy Ministry - not the Church - would decide which is which.
CHURCH LEADERS NOT INFORMED
Although contacts have been going on for a few months, Monti's move to take the bull by the horns surprised Italy's Catholic hierarchy.
"We are waiting to see the exact formulation of the text in order to provide a detailed judgment," the Italian bishops' conference said in a statement.
The Catholic Church is one of Italy's largest private real estate holders and, if the Commission were to rule against Italy, Rome could be forced to order the Church to reimburse the government for unpaid taxes.
While the law would affect all religions, its impact on the relatively tiny property holdings of the Jewish and Muslim communities would be negligible.
The controversy over Church tax exemptions had been bubbling for years but boiled over in the past few months, particularly after the Monti government re-instated a local property tax on primary residences that had been abolished by his predecessor, Silvio Berlusconi.
In a 48-hour period after the austerity package was passed in December, more than 130,000 people signed an on-line petition demanding that the Church be stripped of much of its tax exempt status and pay its fair share.
At first, the Church dug in its heels, saying tax laws had to take into consideration the social benefit of many of its activities.
But, as austerity began to bite into the budgets of ordinary Italians who were forced to pay more taxes and delay their retirements, Italian Church leaders softened their stand and said they were willing to negotiate and rectify any past abuses.
(1 euro = $1.29820)
(Editing by Alessandra Rizzo)