Secret money played a historic role in the 2012 elections. Organizations that do not disclose their donors to the public — often masquerading as nonprofit "social welfare" groups — reported spending more than $200 million trying to influence federal elections. Countless millions more were spent in state elections and on unreported spending on sham "issue ads" that aired early in the election cycle.
Lax IRS and Federal Election Commission enforcement has allowed this secret spending to flourish, leaving the public in the dark about where this vote-seeking money comes from. New York Attorney General Eric Schneiderman has stepped up to combat this disturbing trend. His proposal of new regulations to increase the transparency of some nonprofits is a groundbreaking step toward greater transparency in the state's elections — and an example that the IRS should view as a call to action.
Many dark spenders in the 2012 elections hid their donors from public scrutiny by exploiting election and tax law loopholes that apply to "social welfare" groups, technically known as 501(c)(4) organizations. The 501(c)(4) designation was originally designed to bridge the gap in the law between purely charitable nonprofits — which can engage in no political activity whatsoever — and purely political nonprofits.
According to the federal tax code, 501(c)(4)s are supposed to operate "exclusively for the promotion of social welfare," but are permitted to occasionally get involved in politics so long as it is not their primary purpose.
Unscrupulous groups have exploited this provision, spending millions on politics while promoting no apparent "social welfare" goals at all. One 501(c)(4), Crossroads GPS, spent more than $70 million this year on election-related activities, yet doesn't disclose its donors. Without better disclosure there is no way to independently verify who is funding the organization or how many funders the organization has.
In spite of this blatant abuse of the tax code and repeated pleas by good government groups, the IRS has remained asleep at the switch by failing to take any meaningful action whatsoever. The result is a total absence of oversight of whether these nonprofits are in fact working for the "social welfare" — instead of merely serving as outfits to launder political spending. The IRS even failed to include this problem in its most recent Priority Guidance Plan, which included 317 other priorities for the coming year. While the IRS has alluded that as long as a 501(c)(4) spends no more than 49 percent of its funds for political purposes, the organization is not violating the tax code, there's no clear enforcement of this unwritten standard. More importantly, the 49 percent "rule" is not only at odds with the plain language of the tax code, it's also utterly unfit for a 21st century political system driven by an endless cycle of spending and influence seeking.
Seeing this problem firsthand in New York, Schneiderman took action to address the transparency of these secret political spenders. His proposed regulations would require 501(c)(4)s registered in New York to disclose both the amount and percentage of their expenses spent on elections, regardless of whether the spending is done in the state. Additionally, any nonprofit that spends at least $10,000 in New York state and local elections would be required to disclose the names of all donors who gave at least $100 to the organization in the past year. Donors who prohibited their funds from being used for political purposes would not have to be disclosed.
The proposed regulations serve three important goals. First, they give citizens critical information about who is trying to influence their votes, allowing them to make more informed decisions at the ballot box. Second, they allow the public and regulators to better monitor election spending to guard against the improper trading of spending for political favors. Finally, they help the public in deciding which nonprofits they wish to financially support; donors may be unaware of the extent that their funds are furthering political causes.
Schneiderman deserves praise for his leadership, which is a model for other states and the federal government. Since Citizens United — the Supreme Court decision which held that corporations have an unfettered right to spend unlimited amounts in elections as long as that spending is not coordinated with candidates — political spending by nonprofit groups has exploded, leaving the public and government regulators in the dark. Though the regulations will only directly impact New York, they send a much-needed message to the slumbering IRS that secret spending in elections is a problem. But Schneiderman can only do so much on his own. Ultimately, the IRS must act swiftly to ensure that the tax law is enforced to protect both the country's revenues and our elections.
David Earley is counsel in the Democracy Program at the Brennan Center for Justice.