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Magazine / Rules of the Game

Secret Spending Defines Midterm

Politically active nonprofits are spending millions this election without disclosing their donors. The trend could trigger scandals, audits and fines.

photo of Eliza Newlin Carney
October 22, 2010

By now, the two defining trends of this midterm are clear: Big money and unprecedented secrecy.

It’s a toxic combination, arguably tailor-made to usher in a new generation of scandals and fresh calls for reform.

First, the money. Total spending will exceed $3.7 billion, the nonpartisan Center for Responsive Politics conservatively projects, close to $1 billion more than in 2006. Driving the increase is a spending spree by outside players such as unions, trade groups and nonprofits, which have shelled out more than $150 million so far – more than twice what they spent in the entire previous midterm, the center reports.

 

Now for the secrecy. As spending has gone up, reporting has gone down, thanks in part to the growing popularity of nonprofits as campaign tools. More than two-thirds of the outside groups spending heavily on campaign ads this election are not publicly reporting their donors, according to Public Citizen – a sharp drop from 2006, when most such players disclosed their contributors to the Federal Election Commission.

Democrats lay the blame squarely on the Supreme Court, which freed up corporate and union campaign spending with its landmark Citizens United v. Federal Election Commission ruling this year. The White House and congressional Democrats have made stealth spending by wealthy corporate interests a central campaign theme.

In fact, plenty of secret campaign spending went on even before Citizens United, in the form of “issue” advocacy that amounted to thinly-veiled campaign ads. The difference now is that politically active nonprofits, which are largely exempt from disclosure rules, may openly back or oppose candidates when they use previously-banned corporate and union cash. The ruling also emboldened big donors, particularly Republicans.

Leading Senate Democrats have called on the Internal Revenue Service to investigate, as have a half-dozen watchdog groups, including the Campaign Legal Center, Democracy 21, and Public Citizen. In the spotlight are a string of GOP-friendly nonprofits that have spent close to $50 million on closely contested House and Senate races, all without disclosing a single donor.

These include Americans for Job Security, a business-friendly nonprofit; the American Future Fund, a nonprofit underwritten in part by the ethanol industry; Crossroads GPS, a nonprofit associated with GOP operatives Ed Gillespie and Karl Rove; the 60 Plus Association, a seniors advocacy group backed by the pharmaceutical industry; and the U.S. Chamber of Commerce.

Republicans have lashed back, accusing Democrats of hypocrisy and of trying to scare away GOP donors. Democrat-friendly nonprofits have also weighed in politically without reporting their contributors – though progressives are vastly outgunned by GOP-allied groups this time around. Republicans are particularly outraged over allegations that the Chamber of Commerce and other pro-GOP groups have taken money from foreign donors – a charge that’s turning out to be a red herring.

Obama administration officials are the ones who violated tax laws, Republicans argue, by improperly disclosing confidential tax information to journalists about Koch Industries, the business conglomerate whose executive vice president, David Koch, has helped underwrite the pro-GOP nonprofit Americans for Prosperity. Senate Republicans have chimed in, warning that an IRS investigation would chill free speech.

In the short term, GOP counterattacks may prove effective. American Crossroads pulled in a quick $14 million in the days following one of President Obama’s attacks. And the Treasury Inspector General for Tax Administration is investigating the charges involving Koch Industries.

But in the long term, political players who exploit nonprofits in campaigns face a systemic problem. IRS rules spell out explicitly that 501(c)4 social welfare groups, in particular, may not make politics their “primary purpose.” The rules are hazy, but most lawyers advise such groups to spend no more than half their time and money on elections. Several political groups are aggressively testing that limit, experts concur.

And Democrats and watchdog groups aren’t the only ones predicting fallout. True, the IRS is notoriously slow to investigate complaints, and the FEC has increasingly embraced deregulation. But tax and election lawyers are already predicting a wave of new audits and investigations after Election Day.

“I expect a lot of aftermath, auditing and review,” said Randy Nuckolls, a partner at McKenna, Long & Aldridge. This year’s election, he added, “is raising the bar to an unprecedented level [on] the use of c(4)s for political activity.” Groups that step over the line could face fines and back taxes, in addition to losing their special tax status.

Donors could also take a hit. Technically, donors who give $13,000 or more to c(4) groups owe a 35 percent gift tax – something the watchdog group Campaign Money Watch informed a half-dozen GOP-friendly political groups by letter last week.

Inevitably, the combination of big money and big secrets is bound to prove explosive – especially as spending escalates in the 2012 presidential race. It’s not quite the Watergate era yet, when donors stuffed their cash in suitcases. But some argue it’s only a matter of time before the next major scandal. In the meantime, the shape of elections to come is unmistakable.

As Center for Responsive Politics spokesman Dave Levinthal put it: “We’re seeing record spending in a midterm, and we know less than we ever have about who’s fueling these ads."

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