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Dark Money Challenges

Dark Money Challenges. National Institute on Money in State Politics May 31, 2013 @GregLColvin California License Plate C3C4527. Why Federal Tax Law Matters. Policy set by Congress, throughout the Internal Revenue Code, requires politics to be paid for with “ after-tax ” money.

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Dark Money Challenges

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  1. Dark Money Challenges National Institute on Money in State Politics May 31, 2013 @GregLColvin California License Plate C3C4527

  2. Why Federal Tax Law Matters • Policy set by Congress, throughout the Internal Revenue Code, requires politics to be paid for with “after-tax” money. • No business expense deductions (162) • Charities prohibited (501(c)(3)) • Other exempt orgs ((c)(4), (c)(6)) limited • Political orgs pay tax on investment income, must disclose donors (527) • System is universal: federal, state, local, foreign • Who else but the IRS could be the referee?

  3. Tax Categories, Politics Permitted • 501(c)(3) charities 0% • 501(c)(4) social welfare orgs <49%? • 501(c)(5) labor unions <49%? • 501(c)(6) trade associations <49%? • Gap (no tax exemption?) 50 to 85%? • 527 political organizations >85%?

  4. But what is political intervention? • IRS: depends on all the facts and circumstances • Intent is irrelevant • More than express advocacy, but what? • Multi-factor rules for issue advocacy v. political campaign ads • SO, some with big $ abuse the system • ….and the speech of many is chilled

  5. Problems • Supreme Court’sCitizens United decision blew the lid off federal & state prohibitions & limits on corporate & labor union independent political expenditures • Leaving the tax code as the only law, and the IRS as the only enforcement agency, limiting independent expenditures

  6. More Problems • “Facts and circumstances” standard is vague and unpredictable • Multi-factor tests led to creative interpretations: thin disguise for issue ads • “Less-than-primary” limit for (c)(4), (c)(6) exempt orgs interpreted as 49% • 501(c) orgs don’t disclose donors • 501(c) orgs can delay or avoid filing exemption applications

  7. Even More Problems • In 2011, IRS tried suddenly to audit a few donors to 501(c)(4) orgs for non-payment of gift tax; forced to back down • After Citizens United and SpeechNow, 527 SuperPACS paired with 501(c)(4) and (c)(6) exempt orgs spent big on 2012 elections • IRS, overwhelmed with (c)(4) applications in 2010-12, managed them badly, allowed partisan search terms to select some for extra scrutiny

  8. How to Game the IRS System • Set up a (c)(4), (5), or (6); self-declare instead of filing an application • Collect undisclosed donations • Spend on express advocacy up to 49% • Fulfill exempt purpose with issue ads and other quasi-political activities, take advantage of unclear IRS standards • Fulfill exempt purpose with grants to other exempt orgs………

  9. The EO Grant Shuffle • Org A spends $100m: $49m for express advocacy, $31m for issue ads, $20m in grants to Org B for social welfare purposes • With $20m more for social welfare, Org B raises and spends $19m on politics, grants $10m to Org C for social welfare • Org C can raise, spend $9m more on politics • $20m grant from Org A = leverages $38m more on politics, counting the same $ as social welfare in the hands of Orgs A, B, and C

  10. Remedies - small • Consolidate IRS Rev Ruls 2004-6 and 2007-41 on issue advocacy v. political campaign ads, include targeting as bad factor • IRS could issue Rev Rul: only direct activity counts as social welfare, not grants • Teach IRS agents to use neutral search terms to select exemption apps for possible political activity ---- party, action, against, better, campaign, initiative, coalition, government, policy, voters, election, committee, etc.

  11. Remedies - medium • Bright Lines Project (Public Citizen) report launched 5/24/13 asking Congress, IRS to define political intervention clearly* • “Silver bullet” amendment to Internal Revenue Code, set 501(c) limit at 10%, push most political spending into 527s, where donors disclosed (all 501(c)s, not just (c)(4)) • Realign 527 so it fits with rest of the Code * started by OMB Watch at 2009 Pocantico retreat hosted by Rockefeller Brothers Fund

  12. Remedies - large • Amend US Constitution to undo Citizens United. Options: • Constitutional rights only for humans, not corporations (unintended consequences?) • Empower Congress and States to regulate campaign financing, including bans, limits • Allow only natural persons to finance campaigns (take out all organizations, taxable or exempt, put IRS out of misery)

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