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Sunshine for the Super PAC: The DISCLOSE Act Would Eliminate Anonymous Donors

by Alex Engler

Last month, Senator Sheldon Whitehouse (D-R.I.) introduced an updated version of the DISCLOSE Act, legislation aimed at improving transparency in campaign-related spending.

Senator Whitehouse’s attention is certainly warranted. Right now, corporations and labor unions can unload their treasuries into independent expenditures.  Super PACs and traditional PACs are operating under the same roof.  The relevant regulatory body, the Federal Election Commission (FEC), can’t decide if a candidate filming an advertisement specifically for a DNC TV spot qualifies as coordinating with the DNC.  In short, campaign finance is a mess.

Oddly enough, the revised edition of the Democracy is Strengthened by Casting Light on Elections (DISCLOSE) Act would not change any of that. Yet, by addressing one critical issue, the DISCLOSE Act has the potential to be the most important piece of legislation debated by Congress in 2012.

Not for Lack of Competition

In 2010, the original DISCLOSE Act was plagued by controversial and politically motivated exemptions. Championed by Congressman Chris Van Hollen (D-MD), the bill eventually passed the House of Representatives, but it failed to attract the single Republican vote necessary to achieve cloture in the Senate.  However, Senator Whitehouse’s reboot legislation seems to be more practically constructed. It steers clear of partisan exemptions and avoids a symbolic attempt to reinstate the limits that were struck down by the Supreme Court ruling Citizens United v. FEC.

Instead, Whitehouse’s revised DISCLOSE Act focuses specifically on instituting disclosure rules and disclaimer requirements to fix holes created in the recent upending of American election law. Most importantly, the law would require organizations that file under 501(c)4 of the tax code to quickly report contributions if they spend money on campaign-related advertisements.

501(c)what?

Internal Revenue Code Section 501(c)4 denotes a non-profit, tax-exempt classification intended for social welfare organizations (e.g. Veteran’s of Foreign Wars USA). 501(c)4s are unique in that they effectively have no disclosure requirements concerning donor information.  In the aftermath of Citizens United v. FEC and Speechnow.org v. FEC, a related D.C. Court of Appeals case, all corporations can spend general treasury funds on independent expenditures to influence elections. As a consequence, 501(c)4 organizations are being used as campaign finance vehicles in order to collect contributions that are not only unlimited, but also anonymous.

Whether they know it or not, when politicians and journalists talk about anonymous funding of Super PACs they’re actually referring to 501(c)4s. The anonymity loophole makes this tax code classification an appealing choice for political benefactors who value large donations while keeping their names out of the news and corporate interests that want to avoid political fallout. Even Super PACs can’t offer that combination:

According to the Internal Revenue Code, 501(c)4s are required to be “primarily engaged in promoting in some way the common good and general welfare of the people of the community,” and “operated primarily for the purpose of bringing about civic betterments and social improvements.”  This regulation goes on to state that “direct or indirect participation or intervention in political campaigns” does not qualify as social welfare promotion.  Yet every major Super PAC is paired with a 501(c)4, and while the social welfare is difficult to find, the campaign participation is unambiguously not.

At a Crossroads Indeed

The conservative organizations American Crossroads (a Super PAC) and Crossroads GPS (a 501(c)4) make up the best-known tandem. Together, the Crossroads network is run by an A-list staff that includes Karl Rove and Ed Gillespie as senior advisors, Steven Law as CEO, and Mike Duncan as Chairman of it Board of Directors. Additionally, this past September, Haley Barbour signed on as the chief fundraiser.

When Crossroads made its impressive debut in the 2010 midterm elections, it spent $38.6 million, beating out every other outside spending group (i.e. non-candidate campaign and non-party committee).  The emerging network trounced established political institutions like the Chamber of Commerce and the Service Employees International Union.  Crossroads’s expenditures accounted for over 20% of all conservative outside spending on federal elections in 2010. That’s an impressive market share even before accounting for the fact that the Super PAC-501(c)4 structure had only been legal since the January before the election, and its first donation didn’t come until July.

The Crossroads network has no intention of slowing down, and has declared an unrivaled $240 million fundraising target for the 2012 cycle. This is a truly staggering amount of money in campaign finance.  To put that number in context, recall that Barack Obama’s record-obliterating campaign raised $750 million.  John McCain’s presidential bid took in $380 million.  In 2008, according to the Center for Responsive Politics, the average incumbent Senator raised $8.3 million and the average House Representative raised just $1.2 million.

So $240 million is a game-changing amount of money.

Back in 2010, Crossroads GPS used its anonymous donations to fund a series of highly partisan (and often misleading: see politifact.com and factcheck.org) advertisements attacking Democrats.  Although these ads did not explicitly call for the election or defeat of a candidate, their purpose is clearly political in nature.  Despite having no function related to social welfare and no occupation aside from collecting donations and churning out political ads, Crossroads GPS and many others are able to eschew reasonable donor disclosure requirements through the 501(c)4 anonymity loophole.

This loophole is not trivial either.  Nearly half (44%) of the money the Crossroads team spent, or $17.1 million, originated at Crossroads GPS from anonymous donations.  Assume for a second that this ratio holds true for 2012, and the Crossroads network meets its fundraising target…

All of the Marbles

That’s $110 million in political spending from one organization, with no public record of source.  Of course, this number is hardly a precise figure and it may be overstated. However, it is reasonable to assume that Crossroads GPS and many other 501(c)4s, on the left and the right, will raise enormous amounts of money.  They could easily outpace what Swift Boat Veterans for Truth (SBVT) and other 527s spent in 2004.  So far, this election cycle’s ads have not abandoned any claim to veracity as SBVT’s commercials did. Still, in terms of outside spending it seems likely that 2012 will more closely resemble the smear campaigns of 2004 than the relative civility of 2008.

Nine-figure sums of anonymous outside spending pose a legitimate threat of corruption.  Identifying instances of quid pro quo bribery between donors and politicians is already intensely difficult. Allowing the 501(c)4 anonymity loophole to persevere makes life much easier for the Machiavellian few who seek to peddle incumbency for political favors.

Senator John McCain agrees, and went so far as to say that he expects “a major scandal associated with the Supreme Court decision Citizens [United v. FEC].”

The Best Disinfectant

Since Buckley v. Valeo in 1976, the Supreme Court has upheld campaign-related disclosure requirements in the interest of deterring corruption. In Citizens United v. FEC, Justice Kennedy wrote that disclosure is “justified by a government interest in providing the electorate with information about election related spending sources.”  Even when this Supreme Court reversed decades of campaign finance jurisprudence, it recognized the value of open information in the campaign finance system.  Senator Whitehouse’s DISCLOSE Act can’t undo Citizen’s United, and Crossroads may very well spend $240,000,000 in 2012.  Yet it would close the 501(c)4 anonymity loophole, and stop anonymous donors. Now that the floodgates are open, it could not be more critical to pass the DISCLOSE Act and restore institutional disclosure in our democracy.

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Celebrating its 20th anniversary, the Georgetown Public Policy Review is the McCourt School of Public Policy’s nonpartisan, graduate student-run publication. Our mission is to provide an outlet for innovative new thinkers and established policymakers to offer perspectives on the politics and policies that shape our nation and our world.


'Sunshine for the Super PAC: The DISCLOSE Act Would Eliminate Anonymous Donors' have 2 comments

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    [...] more information about the DISCLOSE Act, please see Alex Engler’s must-read post for [...]

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