Thursday, February 26, 2009

Campaign Finance Institute Study Shows Increased Political Spending by 501(c)'s

A report issued by the Campaign Finance Institute shows that "soft money" contributions to political campaigns by 501(c)(4), (c)(5) and (c)(6) organizations has tripled since 2004, and total spending by these groups now at least equals (probably exceeds) that spent by 527 campaign organizations (note that 501(c)(3) charitable organizations are not included in this study because they are prohibited by law from "intervening in any political campaign"). Another interesting observation by the report is the following:

If Democratic-oriented 527s dominated the soft money system in 2004, the rise of the 501(c)s in 2008 has evened the partisan balance. Democratic-leaning 527s, largely financed by labor unions and wealthy individuals, held more than a 2-1 advantage over Republican-oriented ones. But among 501(c)s, Republican-inclined groups -- mainly backed by businesses and wealthy individuals -- maintained the same edge over their pro-Democratic rivals.
These findings pose a challenge to campaign finance reform groups who want the Democratic-controlled Congress to bring the predominantly Democratic-leaning 527s under essentially the same “hard money” contribution limits as Political Action Committees (PACs). Such legislation could however leave predominantly Republican-oriented 501cs -- who pursue essentially the same campaign activities as 527s -- an open field. (This is especially the case because tax laws give the predominantly labor union funders of 527s strong financial incentives to use 527s rather than 501cs for their political operations).

What the study does not speculate on is why this has happened. 501(c)(4)-(c)(6)'s cannot receive tax-deductible contributions (at least in theory) so there would not appear to be a huge tax advantage to employing these groups for political purposes. On the other hand, it is possible for a 501(c)(3) to form an associated 501(c)(4) for political purposes. Although the finances of the two organizations are supposed to be kept separate so that tax-deductible contributions do not fund the political activities of the (c)(4), I am certain that as in other areas of tax law, there is enough "slop" in the accounting systems that some money filters across the divide (for example, if the (c)(4) is using office space owned by the (c)(3), in theory they should be paying the (c)(3) "fair market value" rent for that space. Yeah, right. Wonder how often the IRS checks up on that??). It may also be the case that the different regulatory regimes between the (c)(4)-(c)(6)'s and 527's are affecting this (less regulation of the (c)'s), though if that is true, one wonders why only the Republicans seem to have figured it out. There has been a fair amount of academic writing on 527's; I guess I need to go back and check those sources to see if there is a potential explanation.

(Hat Tip to Ellen Aprill).

JDC

http://lawprofessors.typepad.com/nonprofit/2009/02/campaign-financ.html

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Comments

527s require disclosure & periodic reports. If one wants to donate a big chunk of money w/ the minimum of reporting and disclosure, a 501c4 is the way to go.

Posted by: jpe | Feb 26, 2009 10:06:28 AM

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