Associations and Campaign Finance Reform

11 min

"After one of the closest elections in our nation's history, there's one thing the American people are unanimous about — they want their government back. We can do that by ridding politics of large, unregulated contributions that give special interests a seat at the table while average Americans are stuck in the back of the room. The Senate needs to act early on campaign finance reform so we can achieve meaningful reform and restore the public's faith in their government."

— Sen. John McCain (R-AZ), principal supporter of campaign finance reform legislation in the U.S. Senate, speaking on January 22, 2001

"This legislation favors special interests over parties, favors some special interests over others, it treads on the associational rights of groups by compelling them to disclose their membership lists to a greater extent than ever before contemplated, it hampers the ability of national and state parties to support state and local candidates, and places new limits on political parties' ability to make independent and coordinated expenditures supporting their candidates."

— Sen. Mitch M. McConnell (R-KY), principal opponent of campaign finance reform legislation in the U.S. Senate, speaking on March 20, 2002, after the Senate had cleared the way for final enactment of the bill

So much of the debate over the new campaign finance reform law, both now and prior to President Bush's March 27, 2002 signing, has been over the "big-ticket" items — a battle between protectors of free speech and defenders of clean government. But in all the countless articles and television talk show debates that have focused on this issue, the discussion of the actual contents of the legislation has been limited, to say the least. Sure, these reports might mention that the new law will ban "soft money" and limit "issue ads," but seldom did the discussion of the bill's contents go any deeper.

So, just what does the new law really do, and how will it affect the day-to-day activities of your association? Are America's trade and professional associations — groups that are so frequently and unfairly painted as the "special interests" that have been allegedly corrupting elected officials for years now — actually going to benefit from the new regime? Or will they suffer? Now that the dust has settled and the "big-ticket" debate has moved from Congress to the courts, will associations find God or the devil in the details?

As you might expect, the answer is not a simple one. Many associations that have felt it necessary to purchase seats or tables at the big political party dinners in the past may be glad to suddenly find themselves with extra cash in the coming years (but with the law not becoming effective until November 6, 2002 do not be surprised if there aren't more than a few "last hurrahs" this year). Others may be quite frustrated to find that their ability to support or oppose particular legislation is significantly hampered around election time. On the whole, associations will find that their ability to participate in the electoral process will be more difficult and more regulated than ever before.

This article will provide an analysis of all portions of the recently enacted law, with special attention paid to how these provisions will affect associations.

Setting the Stage

Prior to the enactment of this law, associations were already subject to significant restrictions on the amount and type of political activity that they could engage in, based primarily on two laws — the Federal Election Commission Act of 1971 and the Internal Revenue Code of 1986. Federal election law strictly limits the involvement by corporations (including most trade and professional associations) in federal political activity. Generally, the only means by which associations exempt from tax under sections 501(c)(6) or 501(c)(4) of the federal tax code have been able to openly support or oppose candidates for federal office has been to form affiliated political action committees ("PACs"), which generally may only accept donations from individuals. Associations exempt from federal income tax under section 501(c)(3) of the federal tax code have been even further restricted — the tax code includes an outright ban on political activity by these organizations. Other groups — PACs and political parties in general — qualify as exempt organizations under a section of the tax code specifically created for political organizations. These groups, organized under section 527, are exempt from tax by virtue of their engaging in political activity.

(It is important to note the distinction between lobbying and political activity. Under tax law, attempts to influence legislation, regulations, or the general public will generally fall into the lobbying category. The tax code does not prohibit 501(c)(3) organizations from engaging in lobbying, as long as such activity is not "substantial.")

Court decisions, including but certainly not limited to the landmark Buckley v. Valeo decision by the U.S. Supreme Court in 1976, significantly limited the federal election law's restriction on corporate political activity, due to concerns that applying the restriction beyond communications that expressly advocate the election or defeat of a clearly identifiable candidate for federal office would infringe on the U.S. Constitution's protections of citizens' right to petition the government, engage in free speech and freely associate. As the election law's restrictions were reined in by these court decisions, political parties discovered that they were able to raise money from corporations and use the money to pay for communications (advertisements, etc.) that might be viewed as political communications in the eyes of the IRS, but that lacked any of the so-called "magic words" (e.g., "Vote for candidate X" or "Vote against candidate Y") that would cause the Federal Election Commission (FEC) to treat the communications as "express advocacy."

Similarly, other political groups have formed in recent years under section 527 of the Internal Revenue Code, but have limited their communications so that they could not be construed as "express advocacy." These organizations are allowed under the law to collect corporate donations and spend the money on communications that might implicitly suggest that viewers or readers should support or oppose a candidate, but didn't come right out and say it. (Until recently, those donations went unreported. A hastily drafted bill requiring these groups to make such disclosures became law in 2000. The association community has been working ever since to point out to Congress that the net it cast to get these so-called "stealth PACs" to report their activities was far too wide, requiring purely state-based PACs to make new and duplicative reports to the IRS.)

The political parties' growing reliance on this type of donation (generally referred to as "soft money") as well as the increase in number and importance of the "stealth PACs" combined to create an atmosphere where the much-debated and often-defeated campaign finance reform legislation actually stood a chance to pass. The Enron scandal, with the breathless allegations of access having been purchased through soft money, probably gave campaign finance reform supporters the final push they needed to get the bill passed by Congress and signed, albeit reluctantly by President Bush.

Looking under the Hood

No doubt about it, this new law radically alters the current system of financing elections. But for associations, one of the most significant items of note is what the law doesn't do: while it raises the legal contribution limits placed on donations to federal candidates and political parties, it leaves the PAC annual contribution limit at $5,000.

Additionally, the "soft money" provisions have certainly been the most talked-about, but they have little direct impact on the association community. The provisions cover three major areas. First, there is a prohibition on the national parties from raising and spending money that is not subject to the limits and prohibitions of federal election law. Second, there are restrictions placed on state and local parties. Third, there is a prohibition on federal candidates from soliciting contributions for state candidates.

Taking Issue

Some trade and professional associations and other nonprofit groups will be significantly affected by the law's new restrictions placed on issue advertisements. Such groups may occasionally promote their views on issues to the general public through TV, radio, phone calls, mailings, and the Internet. Sometimes, these communications refer to Members of Congress (for example, "Call Congressman X and tell him to support the Y bill" or simply "Congresswoman Z supports this legislation" or "Your Congressman opposes our position"). These communications are often made close to the time of a primary or general election. Furthermore, organizations or individuals making the communications may contact the candidates to discuss the effect of making the communication or the best way to make the communications. The purpose of these communications may be to advance a position on a specific bill or regulatory action (that is, these are truly intended as lobbying communications), but some of these communications very much resemble campaign advertisements except that they lack the magic words that would cause the communications to be viewed as the type that are strictly regulated by election law.

First, the law prohibits most of what it terms "electioneering communications." These electioneering communications are communications made 60 days before a general election and 30 days before a primary election that are "broadcast, cable, or satellite communications which refer to a clearly identified candidate for Federal office." Such communications need not promote, support, attack, nor oppose a candidate to be covered. These messages are prohibited during the time periods if they are paid for, in part or in whole, by a corporation. The only corporations excluded are Section 501(c)(4) organizations and Section 527 political committees. Even these groups, however, are limited in how they can engage in this activity. They may not use any funds provided by other corporations or unions to pay for the "electioneering" communications. And there is a further restriction that has not been widely reported — 501(c)(4) organizations and PACs may not make electioneering communications if they "can be received" by 50,000 or more people in the congressional district of the Member identified, or in the state of the Senator identified (not a difficult threshold level to reach). Further, the law requires that, for those limited electioneering communications which may be made by 501(c)(4) and 527 organizations, the names and addresses of all individuals who contributed an aggregate amount of $1,000 or more to the organization must be disclosed to the FEC.

In other words, the new law prohibits your association from running a television or radio ad, or perhaps even an Internet communication, within 60 days of a general election or 30 days of a primary election that expressly names a candidate for federal office. Further, your association's PAC is prohibited from doing the same thing, if the communication can be received by more than 50,000 people. This becomes in effect a ban on certain independent expenditures made by your association's PAC, even though the money collected by the PAC is only given by individuals, and is subject to strict limits.

Another important point about this new law and its impact on association activity is that any electioneering communications that are "coordinated" with a candidate or party are considered to be contributions to the candidate or that candidate's party. Because a PAC may only contribute $5,000 per election to a candidate, and most such communications would cost more than $5,000 to make, they would be excessive contributions and therefore prohibited. Coordination is defined as "a payment made in concert or cooperation with, at the request or suggestion of, or pursuant to any general or particular understanding with" a candidate. Furthermore, the new law provides that when the FEC issues regulations to help define coordination it may not require "collaboration or agreement to establish coordination." Thus, virtually any contact between the candidate and a group could be considered to be coordination — or at the very least could subject such a group to investigation to establish whether there was coordination.

Associations will also be further limited in the manner in which they may raise funds for their related PACs. Any organization described in section 501(c) of the tax code that "makes expenditures or disbursements in connection with an election for Federal office (including expenditures for Federal election activity)" or Section 527 organizations, may not accept donations from political parties. Furthermore, officers and agents of national, state, or local party committees, or any entity that is directly or indirectly established, financed, maintained, or controlled by a party cannot solicit funds for such tax-exempt organizations. Thus, it appears that an association that supports a PAC could not have an agent of a political party do any type of fundraising for the association. Finally, the law contains a provision limiting federal candidates and office holders (and their agents) from raising any money in excess of $10,000 a year from individuals for nonprofits that either engage primarily in voter registration, voter identification, get-out-the-vote activity, or generic campaign activity.

Conclusion

Of course, there has been one obvious group that has already begun to benefit from the new law — the legal profession. Lawsuits have already been filed and more are expected challenging virtually all the major aspects of the law. The "soft money" prohibitions will limit the way parties raise money and will likely lead to outsourcing party building and get-out-the-vote activities to independent groups. Judging from earlier U.S. Supreme Court decisions in this arena, the soft money provisions could be vulnerable to a court challenge.

However, the restrictions on electioneering communications (particularly those made by PACs) are the most likely to be deemed to be unconstitutional when the legislation is challenged. One very plausible result of the legal challenges could be the overturning of all restrictions on electioneering communications made by PACs and other groups that only spend money that was donated by individuals, while upholding the soft-money ban. Should this result occur, associations with related PACs may indeed find that they suddenly hold significant sway in the days leading up to federal elections. Thus, without political parties or other organizations buying up air time, association PACs will be among the few independent entities around that can express their views on a candidate during the all-important lead-up days to an election.

For more information, contact Mr. Jacobs at (202) 216-8215 or via e-mail at [email protected] or contact Mr. Constantine at (202) 513-4790 or via e-mail at [email protected]