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Volume 17: Campaign Finance

The Best Government Money Can Buy

“I have decided to stop taking offense at the suggestion that we are buying influence. Now I simply concede the point. They are right. We do expect something in return. We expect to foster a conservative governing philosophy consisting of limited government and respect for traditional American virtues. We expect a return on our investment.” – Betsy Devos, U.S. Secretary of Education

The easiest way to influence government is with money. The extent to which a nation moderates this influence is the extent to which it is willing to regulate it.

We can tell an entire history of the United States, parallel to the one you learned in high school, looking only at how money affects politics. The creation of the patronage system and the backlash against it leading to civil service reforms. Tammany Hall and the era of city machines. Robber barons and trust-busters. Dirty tricks and dirty money, of which the Watergate Investigations only scratched the surface. Again, a backlash – new laws passed to rein in the worst abuses. The bursting of the dam in the Citizens United case.

Money in contemporary American politics can be split into three categories: hard, soft, and dark. In this Volume, we look at each, consider where it comes from, how it is regulated, and how it is used to affect elections – and the operations of the Government beyond.

  • What is hard money?

  • What is soft money?

  • What is dark money?

What is hard money?

The first American to use money in politics was The First American: George Washington(1). After losing his race for the Virginia House of Burgesses in 1755, he needed a new way to influence the electorate. He purchased "a barrel of punch, 35 [gallons] of wine, 43 [gallons] of strong cider and dinner for his friends," costing the equivalent of around $195 dollars. It worked; Washington won his seat in the next election. The legislature to which he had been elected, concerned with Washington’s method of gaining votes, forbade such electioneering going forward. Thus began a cycle: a candidate finds a loophole in campaign finance laws, uses it successfully, and the legislature attempts to close said loophole.

Hard money is that which is controlled directly by the official persons or institutions: candidates, parties, and their directly associated committees(2). If you write a $200 check to your local Congressman, that’s hard money. If your next-door neighbor gives $33,400 to the Democratic National Committee, that’s hard money. If a presidential candidate gives money to his or her personal campaign, that’s hard money too.

The modern regulation of hard money is based on the Federal Election Campaign Act of 1971 (“FECA”). FECA has had several major amendments, most critically one passed in response to the Watergate Scandal in 1974. Under FECA and its amendments, campaign donations have strict limits. A person can donate up to $2,700 to a candidate for Federal office, and up to $33,400 to a party committee. Furthermore, all donations over a nominal amount had to be disclosed to the Federal Election Commission, or FEC(3). It’s a logical setup: donations can be made by people, but not by legal entities, and the identity of everybody who makes donations will be disclosed to the public. All pretty reasonable – sunlight, disinfectant and all that(4).

Not for the last time, the Supreme Court stepped in to overrule Congress’s attempt to regulate how our elections are financed. In the case known today as Buckley v. Valeo, the Court consolidated suits against many portions of FECA. This had the effect of causing the Court to rule on the Constitutionality of most of the important features of the law. In doing so, the Buckley Court established general principles, guidelines, and tests via which future cases would be considered. The details of the ruling are far beyond our scope(5), but suffice it to say that:

  • Campaign contributions and expenditures are related to “speech,” not just “conduct.” Therefore, limits must be scrutinized as restrictions on Freedom of Speech.

  • The government has a compelling interest in preventing corruption (and the appearance thereof). Therefore, restrictions are permissible in certain circumstances.

  • Expenditures, whether by candidates themselves or by independent groups, are especially close to speech. Therefore, judicial review of restrictions on expenditures will be especially strict.

  • Disclosure requirements also may impinge on free speech. The state’s interest in preventing corruption permits them only with respect to donations to candidates or actions expressly supporting a candidate.

  • Restrictions on donations by a candidate to his or her own campaign are not permitted.

The hard money system created by FECA and its amendments, as modified by the Buckley decision, remains in place today. Everybody can participate in the process via donations. Obviously, citizens with more means will have more ability to participate, but the $2,700 limit to individual candidates limits how much more. In today’s campaigns, which frequently cost multiple millions a single House seat, one donor’s money will be a small fraction of a campaign’s total haul. The lack of limit on donations one’s own campaign encourages the wealthy to run for office, but I agree there is a First Amendment problem in limiting donations of this type(6).

An Aside: How many political parties are there?

Everybody always refers to the Democratic and Republican Parties, like they are big monoliths. This is, as you may have guessed, wrong.

The majority of the action for both parties is at the state level: Oregon Democratic Party, Georgia Republican etc. So, there are 50 Democratic and 50 Republican Parties, one for each state (and a few more for DC and territories too). These state parties handle primaries, choose delegates for Presidential nominations and liaise with their state electoral board.

The national tie-in for the parties is fairly loose. The “National Committees” (DNC and RNC) raise money and organize the convention. But they otherwise have little formal authority; they aren’t a hierarchy over the state parties. In each Chamber, each party also has a committee to raise money to help in the election of more members. Their ability to put money into races has given them influence, but again, no power.

In accordance with Buckley, there are few limits on how hard money can be spent by campaigns. They can hire staff, send mailings, buy TV airtime, hold events, and support voter turnout. They can also donate to other candidates (within limits) or to their party committees (without limits). They can even pay the candidate a salary(7). Party committees can spend money in more or less the same ways. Committee donations to candidates are capped at a somewhat higher level, $5,000.

Because of the high level of transparency, hard money is the most discussed in the press. When you read about a Senator’s position on a piece of legislation, the next line is often that he or she received so much money from the industry being affected. The media should be more careful with this framework; the money doesn’t come from the industry itself, but employees of companies in said industry. Without question, people do make donations based on what is good for their employer, hoping it will benefit themselves. But many others donate for unrelated reasons, even if – gasp – it is against their own short-term, personal financial interest.

What is soft money?

So many of our historical interludes begin with FDR, and our talk about soft money starts there yet again.

In 1943, the United States was in the midst of the largest military buildup in history, preparing for major landings in the Central and South Pacific, not to mention France. This federal spending stoked domestic inflation. At the same time, a new government regulator, the Office of Price Administration, prohibited wages from increasing to keep up with prices(8). Even though purchases of all goods were severely limited by wartime rationing, this still caused real hardship for workers in critical war industries, like mining, armaments, and transportation. Labor groups began various types of work stoppages, which could have seriously harmed the war effort. The Smith-Connally Act was passed, giving the Federal Government power to fight these stoppages. Smith-Connally also prevented unions from making political donations, perceived to be a root cause of the disturbances.

But in 1944, FDR was running for his fourth term; union money had been critical in his previous campaigns. In order to aid FDR again, labor unions created the first Political Action Committee, or “PAC.” These PACs pooled the small donations of union members, creating a critical mass to use in the campaign. Soon, PACs were launched for others wishing to pool money towards similar political goals, such as corporations or interest groups. Politicians began to launch their own PACs, called “Leadership PACs,” attempting to gain influence through control of pooled campaign funds.

Donations to PACs are regulated in a similar manner as those made directly to campaigns. They must come from individuals, campaigns, party committees, or other PACs. While unions and corporations can encourage stakeholders to give, direct donations by their treasuries are barred. PAC donations are limited(9) and disclosed. PACs themselves register with the FEC; Leadership PACs must state the candidate with whom they are affiliated. On the expenditure side, however, PACs operate differently from campaigns. They are limited in how much they can donate to candidates ($5,000) or party committees ($5,000-45,000, depending on type). Leadership PACs can also spend money on the affiliated candidate for items that aren’t paid out of campaign funds. Any other outlays must be “independent expenditures,” uncoordinated with political campaigns.

Like moths to a flame, political money was attracted by the loopholes available in the PAC system. Corporations would push shareholders and management to donate to affiliated PACs, and special interests would ask the same of their groups’ members. PACs are limited in direct donations to campaigns, but policing independent expenditures has proven challenging. Co-ordination is difficult to prove(10). For example, PACs often engage in negative advertising. Candidates can plausibly deny responsibility for these attacks: they came from an unaffiliated PAC and there is was no co-ordination. As the benefits of the vehicle became better known, PAC money started to really take off in the 1990s.

Bardes et al, American Government and Politics Today, 2009.

In order to combat the growth in soft money, in 2002 Congress passed the Bipartisan Campaign Reform Act, also known as the McCain-Feingold Act. This is another of those complex pieces of legislation, but the goal was simple: limit the role of shadowy soft money. It also prohibited corporate and union money from being used in direct electioneering, such as ads for or against a specific candidate immediately before an election. McCain-Feingold did not really try to end money in politics. It was a reasonable, limited measure, intended to get rid of the worst abuses. So, the Supreme Court obviously ruled it unconstitutional in the landmark Citizens United v. FEC (11).

An Aside: The quotable Citizens United decision

“This Court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption...prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters,” Justice Kennedy, opinion of the Court.

“[The First Amendment] never shows why 'the freedom of speech' that was the right of Englishmen did not include the freedom to speak in association with other individuals, including association in the corporate form.” Justice Scalia, concurring.

“A democracy cannot function effectively when its constituent members believe laws are being bought and sold…At bottom, the Court's opinion is thus a rejection of the common sense of the American people, who have recognized a need to prevent corporations from undermining self-government since the founding, and who have fought against the distinctive corrupting potential of corporate electioneering since the days of Theodore Roosevelt. It is a strange time to repudiate that common sense. While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics,” Justice Stevens, in dissent.

The major takeaway of the Citizens United decision is that any limit on independent expenditures – even by corporations or unions – is an impermissible limit on Freedom of Speech. Limits on direct contributions were still permitted (for now). To take advantage of the Citizens United decision a new entity was needed, one that could raise unlimited amount to engage only in independent expenditures. These “SuperPACs” are a direct result of the Citizens United decision. Corporations would finally have a place where they can legally spend as much as they want to influence elections, as long as they claimed to be independent, which, as we’ve already said, is almost impossible to enforce.

The Citizens United decision relied on proper disclosure of this new flood of money to allow citizens to make informed decisions. Unfortunately, Congress has never set up real disclosure requirements for SuperPACs(12). Even if disclosure was improved, the corporate form, by its nature, makes said disclosure of limited value. There is no way to tell if the money behind a company is a small farmer who wants good government, or a foreign power trying to influence our policy, or even a drug dealer trying to buy a pardon.

What is dark money?

Of course, for some people, even the new SuperPACs had just a bit too much regulation. Why not co-opt vehicles designed entirely for other purposes in order to flood cash into politics? Then you’ll be able to do anything you want! Most dark money organizations are usually referred to by the portion of the tax code under which they exist. No matter the facet of campaign finance with which you don’t want to comply, there is a tax code provision for you.

527: Political Organizations

Yes, there is a type of entity that is (partially) outside the campaign finance system, yet still exists specifically to influence elections(13). 527 groups can accept unlimited donations from anybody, but they (often) need to register with the FEC and disclose their donors. In terms of expenditures, 527s can do pretty much anything, as long as they don’t co-ordinate with campaigns or expressly advocate a specific candidate. Swift Boat Veterans for Truth is a 527, as is Moveon.org. So are both the Republican and Democratic Governors Associations. As is the infamous group behind Citizens United!

501(c)(3): Public Charities and Private Foundations

Section 501(c) of the Tax Code concerns non-profit organizations. Several of its sub-sections are ripe for spreading money around the political field.

Sub-section 3 contains the charities most people are familiar with. Your church is probably a 501(c)(3), as are the ACLU Foundation, St. Jude’s Children’s Research Hospital and the Art Institute of Chicago. Private foundations, like the Gates Foundation or Ford Foundation, are also in this group.

The fact that they are prohibited from direct political involvement doesn’t mean charities can’t be used to affect politics. First, as long as it is “no substantial part” of their overall activity, 501(c)(3)’s can engage in lobbying and issue advocacy. And what does “not substantial” mean anyway? 1%? 5%? How about 49%?(14)

The big advantage of 501(c)(3)’s, as you likely know, is that donations to them can be deducted from your income for tax purposes. This means that when some rich guy gives to a charity that is a de facto political organization, part of this money comes out of the pockets of other taxpayers. In theory, charities are not supposed to provide any benefit to those from whom they receive donations. Imagine the coincidence that many billionaires donate to charities advocating political change that would improve their bottom line.

One downside of perverting charities for political purposes: generally, they are subject to oversight by state governments. Specifically, states can force them to disclose their donors.

501(c)(4): Social Welfare Organizations

Intended to be used exclusively for the “common good and general welfare” of the people, 501(c)(4)’s have also been subverted for political purposes.

A big advantage of social welfare organizations over charities is that it is more difficult to force them to disclose their donors. They can accept unlimited amounts from anybody who wants to give – although the donations are (usually) not tax deductible.

The same “no substantial portion” standard exists for political spending by 501(c)(4) organizations also, but gone is the direct prohibition against supporting or opposing candidates. In theory, they must register if they take part in lobbying activity and, in theory, any moneys spent on electioneering are taxable. But these are, again, difficult to enforce.

This mix of campaign finance law avoidance makes social welfare organizations the core entity type for dark money. By 2012, spending on political advertisements by 501(c)(4)’s was larger than that by SuperPACs. Some of these organizations are operating outside even the most liberal interpretation of the “no substantial portion” standard. But you probably remember when the IRS tried to prevent abuse by blatantly political 501(c)(4)’s. This was the “IRS Scandal” that occurred during President Obama’s administration. Never mind that the IRS action was not directed by the White House, nor that enforcing Section 501(c) is the express job of the IRS, nor that it targeted groups with “Progressive” and “Occupy” in their name, as well as those with “Tea Party.” This limited attempt to enforce both tax and campaign finance laws was hyperbolized by both sides of government and the news media, leading to the resignation or retirement of the IRS officials involved(15).