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Tax-exempt groups skirt campaign-finance rules, play key roles in elections

Mark Reutter, Business & Law Editor

Released 11/16/2006

CHAMPAIGN, Ill. — About $2.8 billion was funneled into the 468 House and Senate races this year – the most expensive midterm election ever.

Despite federal legislation aimed at curbing the influence of money on the electoral system, about 27 percent more was spent in the 2006 Congressional elections than in the 2002 midterm elections, the Center for Responsive Politics has reported.

The increase underscores the ability of two types of tax-exempt groups to get around campaign-finance restrictions and become major players in federal elections, according to an article in the current issue of the University of Illinois Law Review.

“As conduits for soft money, these groups greatly increase the potential for, and the appearance of, corruption in federal elections by continuing to allow large donations from corporations, unions, special-interest groups and wealthy individuals,” wrote Frank J. Favia Jr., a former editor of the law journal, who now works for a Chicago law firm.

Soft money refers to donations that are not made directly to a particular candidate or campaign (known as “hard money”), but rather are given to a political party for “get out the vote,” “party building,” “issue advertising” and other activities.

The Bipartisan Campaign Finance Reform Act of 2002, often referred to as the McCain-Feingold Act after its Senate sponsors, restricted political parties and candidates from directly raising and spending soft money.

Much of this money had been coming from Political Action Committees (PACs). Although corporations and labor organizations are barred from making direct contributions to federal elections, they are permitted to form PACs that raise voluntary contributions from their employees or members and make donations to candidates and political parties.

While McCain-Feingold placed some restrictions on spending by PACs, the 2002 law left “a major loophole for nonprofit organizations not officially connected with political parties to spend unlimited amounts of soft money,” Favia reported.

As a result, wealthy individuals and special-interest groups can now channel hundreds of millions of dollars into two types of organizations commonly known by their tax-exempt status under the Internal Revenue Code.

Non-profit groups registering under Section 501(c) of the tax code are permitted to engage in electioneering activities as long as these activities do not become their “primary” purpose. “Because the concept of ‘electioneering activities’ is still nebulous, this imprecision opens up 501(c) groups as influential soft-money conduits,” Favia wrote.

Labor unions, industry associations, real estate boards, agricultural groups and chambers of commerce all have organized 501(c) groups that send out direct-mail appeals, purchase Web ads and set up telephone banks for Congressional candidates who are sympathetic to their agendas.

Tax-exempt groups organized under Section 527 of the code can raise and spend money directly for political activities, including voter mobilization drives and issue advocacy. While there are some restrictions on these groups (for example, they cannot broadcast advertisements that specifically mention a candidate within 60 days of a federal election), 527s are free to conduct massive direct-mailing and telemarketing campaigns on behalf of favored politicians and political parties.

Examples of 527 groups active in the 2006 election cycle include the Service Employees International Union, EMILY’s List, Economic Freedom Fund, College Republican National Committee and Grassroots Democrats.

In effect, candidates can stand on the sidelines while 501(c) and 527 groups cast aspersions on opponents with little or no accountability. “Few candidates wish to publicly insult their opponents, and with the loopholes in federal election law, they can now sit back and deny responsibility as non-profit groups do this work for them,” Favia wrote.

Together, 501(c) and 527 groups spent almost $1.8 billion in the 2006 elections, according to the Center for Responsive Politics. In addition, PACs remain a popular vehicle for election spending, with more than $1 billion expended in the 2006 elections.

McCain-Feingold was supposed to prevent the dumping of large amounts of money into federal elections, but “the existence and growth of non-profit groups have undermined the spirit of the law,” according to the Illinois journal article.

Favia calls on Congress to pass legislation to restrict the activities of these two types of fundraising groups. “Such legislation would almost certainly be constitutionally permissible and would finally accomplish the McCain-Feingold’s goal of increasing the public’s confidence in this country’s electoral system and in its elected officials.”

The article is titled, “Enforcing the Goals of the Bipartisan Campaign Reform Act: Silencing Non-Profit Groups and Stealth PACs in Federal Elections.”