A GUIDE TO THE CURRENT RULES FOR FEDERAL ELECTIONS. What Changed in the 2010 Election Cycle

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1 A GUIDE TO THE CURRENT RULES FOR FEDERAL ELECTIONS What Changed in the 2010 Election Cycle Right through to Election Day, confusion reigned among the public and the press about the rules governing the estimated $4 billion-plus that was spent on the 2010 federal races. The following is a basic primer on the new campaign finance landscape. The overview first outlines three developments in the election cycle, namely the impact of the Supreme Court decision in Citizens United v. FEC, the failure of the disclosure laws and the emergence of Super PACs. This is followed by brief summaries of the federal tax laws that influence election spending and the current campaign finance law. To view a chart defining the types of outside groups (527s and the various 501(c) organizations) and outlining their tax status, permitted activities, and disclosure requirements under federal tax and election laws, click here. I. The Citizens United Decision In Citizens United v. FEC, the Supreme Court struck down the decades-old federal ban on ind ependent expenditures by corporations (and unions) to influence federal elections. The Court reasoned that the First Amendment does not permit laws to discriminate between corporations and individuals when it comes to electoral spending that is independent of candidates and political parties. However, the federal ban on direct corporate and union contributions to candidates and parties was not considered and remains in effect. Citizens United allows corporations and unions to spend their treasury funds on advertisements expressly advocating the election or defeat of a candidate for the first time in over 60 years. A corporation or union can either spend directly on such express advocacy or it can give to an outside group, such as one of the tax-exempt vehicles described in the sections below. 1 / 9

2 The practical impact of this decision is a vast change in the magnitude of the political money available the difference between a corporate political action committee ( PAC ) spending perhaps hundreds of thousands dollars voluntary donated by corporate employees and a corporation spending millions out of its multi-billion treasury. The decision also created a psychological change in the world of corporate executives who are usually fairly risk averse. With the imprimatur of the Supreme Court, the anonymity provided by certain tax-exempt vehicles and little risk of backlash from consumers or shareholders, corporate executives are feeling freer to act on their perceived economic and ideological interests and to spend corporate funds rather than money from their own pocket to support business-friendly candidates. With this vast new reservoir of money available, there are now new incentives to create mechanisms to undertake independent expenditures using those resources. Because corporations are often reluctant to be publicly associated with express election advertisements, they instead may give to various tax-exempt groups, such as 501(c)(4)s or (c)(6)s, which can run election ads without revealing their corporate donors. This trend appears to be one reason for the surge of anonymous spending in the 2010 elections. II. The Failure of the Disclosure Laws Both federal tax law and federal campaign finance law govern the disclosure of expenditures to influence federal elections. Both have proven to be inadequate in the 2010 elections. Although these laws were not changed in the 2010 election cycle, the inherent limitations of the tax law and a recent FEC interpretation of federal campaign finance law led to an unprecedented lack of political transparency in the election cycle. As described in further detail below, tax law does not require certain groups organized under Se ction 501(c) of the Internal Revenue Code to publicly disclose their donors even if the group engages in explicit election advocacy. This aspect of the tax law is not new; it has just become more salient in light of the surge in spending by corporations and outside groups in the 2010 election cycle. 2 / 9

3 Federal campaign finance law has been recently weakened by the FEC in terms of the disclosure required in connection to certain election-related advertising. Any person or entity that runs electioneering communications, as defined by the law, or advertisements expressly advocating the election or defeat of a federal candidate must file disclosure reports with the FEC. Unfortunately, in 2007, the FEC published a formal explanation of its rules that indicated that groups running these election ads would have to disclose only those contributions that were specifically d esignated for election ads. This narrow interpretation of the law allows contributors to such groups to avoid disclosure by simply refraining from designating their contributions in this manner. In other words, non-disclosure is the default under the FEC s interpretation of the law. Further, three members of the six-member Commission have stated publicly that the only circumstance in which they believe disclosure is required is when a donor specifically designates her contribution for a particular advertisement, which is a nearly impossible standard to meet, given that fundraising usually occurs before specific ads are created. The result is that the percentage of disclosure reports filed with the FEC that list the sources of the reporting group s money has gone from 71 percent in 2004 to only 15 percent in the current election, according to the Washington Post in September of this year. Most 501(c)(4) groups that ran these types of election ads in 2010 have disclosed no donors to the FEC. It is important to note that groups organized under Section 527 of the tax law, which generally must disclose their donors, were also very active in the 2010 election cycle. This is because section 527 allows unrestricted participation in political campaign activity, whereas 501(c) groups, which offer anonymity, are either barred from political campaign activity or cannot have it as their primary activity. For the political activist who does not fear public disclosure, contributing to a 527 thus still provides the best bang for the buck. Moreover, complaints have been filed this year with the IRS against certain 501(c)(4)s on grounds that they are violating their tax status by focusing primarily on political campaign activities; a donor may prefer contributing to a 527 because this tax-exempt vehicle may provoke less legal controversy. Thus, although the disclosure laws have failed in many respects, the advantages of the 527 form mean that a significant amount of outside spending remains subject to comprehensive disclosure requirements. III. The Creation of the Super-PAC 3 / 9

4 The final major change in the 2010 election cycle was the deregulation of federal political committees that make only independent expenditures. As explained in the sections below, federal political committees have long been subject to limits on the funds they raise, although they could spend such funds without limit provided they did so independently of candidates and parties. This year, however, the D.C. Circuit Court of Appeals in SpeechNow.org v. FEC struck down the federal limits on contributions to federal political committees that make only independent expenditures and do not contribute to candidates or political parties. This type of independent expenditure committee is inherently non-corruptive, the Court reasoned, and therefore contributions to such a committee can not be limited based on the government s interest in preventing political corruption. The FEC clarified the impact of this decision by issuing two advisory opinions in July of this year. The first opinion confirmed that political committees that make only independent expenditures are not bound by the federal contribution limits, and the second extended the Spe echnow.org holding to exempt independent expenditure committees from the corporate and union contribution source restrictions as well. Thus, independent expenditure committees, dubbed Super PACs, are now permitted to raise unlimited sums of money from individuals, corporations and unions. It is important to note, however, that Super PACs are still registered federal political committees and thus remain subject to the comprehensive registration, reporting and recordkeeping requirements of federal campaign finance law. Examples of active Super PACs include American Crossroads and America's Families First Action Fund. [1] THE NEXUS BETWEEN TAX LAW AND ELECTIONS As the 2010 election cycle made clear, outside groups are becoming increasingly influential in federal races. Typically these groups organize under certain sections of the federal tax law in order to enjoy tax-exempt status. Depending on the tax-exempt vehicle a group chooses, it will potentially be subject to limitations on its political campaign activities, as well as to some 4 / 9

5 measure of disclosure. A Section 527 group is a tax-exempt group organized under section 527 of the Internal Revenue Code for the function of influencing or attempting to influence the selection, nomination, election or appointment of any individual to any Federal, state, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors. Federal, state and local candidate campaign committees; federal, state and local political party committees; and most other political committees are generally organized under section 527. Only those that accept contributions or make expenditures to influence federal elections of over $1,000 in a calendar year, and that have as their major purpose the nomination or election of one or more federal candidates, are required to register with the FEC as federal political committees. Section 527 groups first rose to public prominence in the 2004 and 2006 federal elections when a number of 527s spent hundreds of millions of dollars on ads to influence federal elections while refusing to comply with the strict contribution limits that applied to federal political committees. They claimed questionably that they did not have to register as political committees because they were not making expenditures to advocate the election or defeat of any federal candidates but instead were engaging in independent issue advocacy. The FEC ultimately found that several of these rogue 527s were in violation of the law and imposed historically high penalties (e.g., The Media Fund, Swift Boat Veterans for Truth and MoveOn.org Voter Fund). 527s groups are required to publicly disclose their donors. If a 527 registers as a federal political committee with the FEC, then it is subject to extensive disclosure requirements under the federal campaign finance laws. Subject to certain exceptions, a 527 group that is not registered as a federal political committee is required to file with the IRS an annual information return and periodic reports disclosing publicly its contributions and expenditures. If a 527 does not disclose a contribution, it must pay tax on the amount of that contribution. Section 501(c) groups. In the 2010 federal elections, we saw the rise of a different class of tax-exempt group, namely groups organized under section 501(c) of the Internal Revenue Code. As was the case with 527s, the universe of 501(c) organizations is far broader than simply those groups that are active in federal elections. A 501(c)(3) organization is a public charity or private foundation (e.g., Boy Scouts of America, 5 / 9

6 Heritage Foundation, churches). Donations to a public charity are tax deductible and donors need not be publicly disclosed under the tax law. A 501(c)(3) is prohibited from participating or intervening in any political campaign for a candidate for public office, and thus these groups were not major players in the 2010 elections. A 501(c)(4) is a social welfare organization (e.g., NRA, Sierra Club). Contributions to a (c)(4) are not tax deductible, and may be subject to a gift tax. Donors also need not be publicly disclosed under the tax law. Unlike (c)(3)s, these groups can participate in political campaign activity for candidates for public office, provided that this is not their primary activity. The IRS uses a facts and circumstances test to determine when a group sponsoring ads is participating in campaign activity. 501(c)(4) groups were particularly active in the 2010 election cycle, as they represented a handy way to ensure donor confidentiality while engaging in a considerable amount of independent campaign advocacy. Examples of such (c)(4)s are Crossroads GPS and American Action Network. 501(c)(5)s are labor organizations and 501(c)(6)s are trade associations. They are also not required to 501(c)(5)s are labor organizations and 501(c)(6)s are trade associations. They are also not required to publicly disclose their donors under the tax law. Similarly to 501(c)(4)s, these groups can engage in political campaign activity provided that it is not their pri mary activity. Both of these types of groups were very involved in the 2010 elections; according to the Center for Responsive Politics, the most active (c)(5) was the Service Employees International Union and the most active (c)(6) was the U.S. Chamber of Commerce. CURRENT CAMPAIGN FINANCE LAWS The FEC is responsible for enforcing the federal campaign finance law. It is a six-member commission made up of three Republicans and three Democrats, who, despite the statutory requirement that they be nominated by the President, are usually hand-picked by the Congressional leadership of the respective parties and consequently protect party interests. Due to its structure, the FEC often ends in deadlock on any significant questions. An individual who is a citizen can contribute $2,400 to a candidate for the primary election, and 6 / 9

7 $2,400 for the general election (a total of $4,800 per person). Individuals can also give $5,000 to a political action committee (PAC) per year; $30,400 a year to a national political party committee per year; and $10,000 to the federal account of a state party committee per year. The most an individual can give altogether is $115,500 for the two-year cycle ($45,600 to all candidates and $69,900 to all PACs and parties). The national party committees (e.g., RNC, DNC) can give $5,000 to House candidates and $42,600 to Senate candidates per election. A multi-candidate political committee (or PAC ) (e.g., EMILY s List) can give $5,000 to a candidate for each election, and $15,000 to national political parties a year. If a PAC makes contributions to candidates or parties, it can only accept hard money, i.e., money raised under the applicable $5,000 federal contribution limit and the ban on corporate and union contributions. But if a PAC makes only independent expenditures (i.e. a Super-PAC), it is not bound by these federal contribution restrictions. Corporations and labor unions are prohibited from using treasury funds to make a contribution to candidates, political parties, and many types of PACs. If a corporation or labor union wants to make a contribution, it must establish a PAC (i.e., separate segregated fund ) (e.g., Exxon Mobil PAC, Int l Brotherhood of Electrical Workers PAC). A corporate/union PAC can accept only voluntary contributions from members of its restricted class (corporate shareholders and executives/ union members) subject to the federal contribution limits. A corporation or union may pay the administrative costs of running their PACs with treasury funds, however. An individual, corporation, labor union or PAC can also make expenditures to influence a federal election without limit provided that they do so independently of candidates or political parties. If, however, an expenditure by an individual or PAC is coordinated with a candidate or political party, then it is considered an in-kind contribution to such candidate or party subject to the contribution limits. A corporation or union may not coordinate its expenditures with a candidate or political party because it is prohibited from making contributions. 7 / 9

8 National party committees are subject to special rules that allow them to spend money in coordination with their candidates in amounts greater than the otherwise applicable contribution limits would allow. The coordinated party expenditure limits vary between $43,500 for expenditures coordinated with certain House candidates to over $2 million for expenditures coordinated with certain Senate candidates. Political parties also may spend unlimited amount to support their party nominees if they do so independently of their candidates. All of the contributions and expenditures listed above must be reported to the FEC. All federal political committees including candidate campaign committees, party committees and receipts and disbursements in regular reports to the FEC. All individuals and entities must file disclosure reports with the FEC in connection to two types of advertising: (1) express advocacy, i.e., ads that expressly advocate the election of a federal candidate, and (2) electioneering communications, i.e., broadcast ads that mention a federal candidate, and run within 30 days of a primary election and 60 days of a general election. PACs must report all receipts and disbursements in regular reports to the FEC. All individuals and entities must file disclosure reports with the FEC in connection to two types of advertising: (1) express advocacy, i.e., ads that expressly advocate the election of a federal candidate, and (2) electioneering communications, i.e., broadcast ads that mention a federal candidate, and run within 30 days of a primary election and 60 days of a general election. HOW IT WORKS When it comes to influencing public policy in the U.S., many corporations, unions and ideological groups can use several organizational forms: A group can create a (c)(3) organization to do its research, public education and policy work. 8 / 9

9 It can also have a (c)(4) to head up its lobbying and to run election ads, provided that the latter activity is not the primary activity. The (c)(4) can provide cover for those donors that do not want to be publicly associated with the group s election advocacy. A group can also establish a 527 if it wishes to do unlimited independent spending on election ads. If the 527 has as its major purpose the election of a federal candidate, then it must register with the FEC as a federal political committee. However, even if the 527 registers as a political committee, if it engages only in independent spending (i.e. a Super-P AC), it no longer has to comply with the federal contribution restrictions in terms of its fundraising. If the group wishes to make direct contributions to candidates, then it can establish a PAC, which can only raise contributions subject to the federal limits, as well as to the ban on corporate and union contributions [1] One interesting development may result from the creation of Super PACs is that a number of 527s that might have gone rogue in past elections may have instead registered with the FEC in the 2010 election because they are no longer subject to federal contribution limits and source restrictions. This is in contrast to the behavior of certain 527s in past elections described in the sections below. The invalidation of the federal contribution restrictions in connection to independent expenditure committees may have thus indirectly led to a greater percentage of federally-oriented 527s accepting the authority of the FEC to oversee their activities. 9 / 9