On March 8, 2005 the Senate Rules Committee held a hearing to consider the 527 Reform Act of 2005 (S. 271). While not heavily attended by committee members, the hearing revealed the complexity of issues raised by the proposed extension of federal election regulations to independent political committees (527s). The testimony and questions from Senators highlighted the likely consequences of passing the bill in its current form, including migration of soft money to 501(c) groups, who, unlike 527s, do not disclose donors. Rules Committee Chair Trent Lott (R-MS), a co-sponsor of the bill, said he wants to move the bill quickly, in order to prevent a “train wreck” in the 2006 federal election. Meanwhile, an alternative 527 bill was introduced in the House of Representatives. Witnesses include the bill’s sponsors, Senators John McCain (R-AZ) and Russell Feingold (D-WI), the chair of the Federal Election Commission (FEC), Scott Thomas, and FEC Commissioner David Mason. Expert testimony was provided by attorney Bob Bauer, Prof. Fran Hill, a consultant to the Campaign Legal Center, and Michael Malbin, Executive Director of the Campaign Finance Institute. Citations to pages of the transcript in this summary are indicated in italics. Philosophies of Reform Differ Sen. McCain testified that federal campaign finance rules and limits should apply to any group that engages in partisan activities for the purpose of influencing a federal election, interpreting the Supreme Court’s 1976 Buckley v. Valeo decision upholding the Federal Election Campaign Act as requiring this approach. FEC Chair Thomas echoed this view, referring to Section 527 of the Internal Revenue Code, which exempts groups whose primary purpose is influencing elections, saying, “I have philosophically have always taken the approach that these kinds of groups, given their tax status, should be reporting to us and regulation as Federal political committees...” p. 37 Michael Malbin of the Campaign Finance Institute said there is no rationale for not having contribution limits. p. 66 Other witnesses discussed constitutional rationales for limiting and regulating political activity, noting that corruption, or the appearance of corruption, must be demonstrated before free speech and association can be limited by campaign finance laws. The potential for corruption by independent groups, which do not have direct ties to candidates or parties, was questioned. Commissioner Mason said, “And so, when you are regulating organizations that only make independent efforts, that are not controlled by parties, not controlled by candidates, not coordinating, there is a live and open constitutional question as to whether or not that can be limited.” Mason noted that this issue is in litigation in more than one federal court, and “it would be simply unwise for Congress to forge ahead, knowing that this is under judicial review and not do a careful job of enunciating why you think it is constitutionally permissible and necessary to limit this.” p. 42 Malbin cited the Campaign Finance Institute’s study which showed that 527s raised $405 million in 2004, “more than two and a half times the $151 million they raised in 2002.” The research found businesses and trade associations have $30 million, unions gave $94 million, and most of the money came from individuals. Malbin noted that 265 individuals accounted for 88 percent of funds from individuals.p. 66 He contrasted this to the growth in small donors (below $200) to the political parties in 2004. Malbin told the committee he thinks 527 contributions will grow rapidly in the future if not regulated, since only one out of eight soft money donors from past elections gave to 527s in 2004, noting “there is a lot of room for growth in this sector.” p. 67 The result would be that donors to large 527s would be able to get attention from officeholders and parties after the fact, creating a potential “nexus of reciprocity” resulting from officeholders being aware of major donors to 527 groups that support them. p. 68 Attorney Bob Bauer challenged these assumptions, warning that, by extending campaign finance regulation to independent groups, Congress is heading toward regulation of all political activity. The result, he said, would be “virtually endless re-regulation of the political process.” p. 73 Potential Impact of S. 271 The bill’s sponsors responded to criticism that the bill will have negative impacts on 501(c) organizations, saying their intention is to limit the impact to 527s, and indicated willingness to make changes to clarify the bill’s language if necessary. Most of the discussion during the hearing focused on where money that now goes to 527s will go if federal contribution limits are imposed. The primary focus was on groups exempt under 501(c) of the tax code, including charities, social welfare organizations, unions and trade associations. One witness predicted contribution limits on 527s would steer donations toward the political parties because of negative gift tax consequences of large donations to 501(c)(4) groups. Impacts on 501(c) Organizations Sen. McCain’s testimony said the “legislation does not affect 501(c) nonprofit organizations p. 24-25, and there is no basis for claims that it will, because 501(c)s are not engaged in partisan political activities. His statement assumed that all 501(c) organizations are bound the by the ban on intervention in elections that applies to charities under 501(c)(3), but other witnesses noted that 501(c)(4) social welfare organizations, 501(c)(5) trade associations and 501(c)(6) labor unions are all allowed to engage in some degree of partisan activity, as long as it is not their primary purpose. Sen. Feingold said the sponsors “do not want to regulate 501(c) organizations, and we do not want to regulate organizations that work only on state elections...”, noting that “care must be taken not to chill the legitimate activities of 501© advocacy organizations that do not have the primary purpose of influencing elections.” p. 18 He urged Congress to work with the bill’s sponsors to repair any problems in the language, and “Do not just assume, as some of our critics do, that if there is a flaw in the language, we have some dark and hidden motives.” p. 19 He noted that Commissioner Mason’s testimony raised technical problems and expressed openness to constructive criticism. One of the major objections 501(c) organizations have raised to the bill is its use of the phrase “described in 527" to define the universe of groups that would be brought under federal election regulations. Feingold said this language does not mean the FEC could go after 501© groups by claiming they are “described in 527", citing Section 527(i)(1) of the tax code, which provides that “an organization is not described in 527 unless it has given notice to the IRS that it should be treated as a 527.” However, Commissioner Mason’s testimony pointed out that all 527s are not required to register with the IRS, and asked, “what is going to happen under this bill is the Federal Election Commission will get a complaint that says this organization is described in Section 527....and the question is at that point, who makes the threshold determination? Does the FEC make the threshold determination about whether the organization is described in Section 527? Do we ask the IRS to do it? Do both of us have authority to do that?” p. 43 Mason noted that 501(c)(4) groups are allowed to do some partisan political activity, and if the FEC gets involved in determining whether or not this has become their major purpose, making them subject to FEC rules, “It then would get you involved in this question of whether this bill somewhere down the road is implicitly going to affect some of those 501, probably not (c)(3) but (c)(4) and (c)(6) organizations.” p. 41-42 Attorney Bob Bauer agreed that the bill would create a problem, saying, “It puts the IRS and the FEC in the position, essentially, of conflicting with each other and achieving a coordination that has so far escaped them. It puts 501(c) organizations in the line of fire almost certainly.” p. 75 Sen. Nelson expressed concern about relationships between 501(c)(3) and 527 organizations, and said he would like the committee to clarify appropriate separation of the two types of groups so that they do not blur together. p. 24 Sen. Stevens said he does not want to regulate 501(c)(3)s in election law, but said some, “501(c)(3)s are actually employing people who are handling these 527s”, and feels 501(c)(3)s should not be hiring people who run 527s. p. 6 Migration of Political Money to 510(c) Organizations? Both witnesses and Senators raised concerns that political money would migrate from 527s to 501© organizations. Commissioner Mason said his fear is that if S. 271 passes “527s will disappear” and with it the benefit of “complete IRS disclosure, all the money coming in, all the money going out except for the very small contributions.” He pointed out that the data about funding of 527s in the 2004 election is available because of this disclosure. p. 48-49 Senators Bennett, Dayton, Lott and Nelson all expressed concern over the likely consequences of losing 527 disclosure. Sen. Dayton’s questions explored ways migration of money from 527s to 501(c)s could be prevented, including changing the gift tax on large donations to 501(c)(4)s. He said the committee should get more information on the tax consequences of S 271. p. 60-62 Commissioner Thomas characterized migration of money to 501(c)s as “fronts”, saying, “I think there is the potential for some organizations attempting to switch over some of the activity to the (c)(4) front, maybe even the (c)(3) front.” p. 51 He also predicted that gift tax issues could direct political money to the parties instead, which would address concerns raised by Sen. Bennett that candidates and parties are losing control over their own campaigns, which he felt will weaken the electoral process. p. 52-54 Federal Regulation of State and Local Political Committees Attorney Bob Bauer warned that S. 271 “Federalizes State and local elections activity and has the result of unjustifiably imposing major new costs on Federal political committees that are active in both Federal and nonfederal elections and Federalizes their nonfederal elections activity as well.” p. 75-76 This problem arises from the bill’s proposed new allocation formula, which would require nonfederal accounts to pay for half the cost of communications that mention political parties or occur in elections with federal candidates on the ballot. It also imposes a $25,000 contribution limit on nonfederal funds. Commissioner Mason urged the committee to reconsider the provisions relating to state and local political committees, saying current FEC regulations require allocation of federal and nonfederal accounts on a time and space basis, which results in more realistic results. He also urged the committee to “look at harmonizing the local exemptions in the 527 legislation for tax purposes and in this bill. In 2002, you made some changes to the 527 legislation to exempt groups involved in State and local politics from having to file with the IRS. S. 271 also has a State and local exemption, but it is different. And if the theory is that political for tax purposes is political for FECA [Federal Election Campaign Act] purposes, the, I would ask the question why is the local not the same rule?” p. 43-44 Long Term Approach and Impacts Sen. Nelson noted that likely migration of political money from 527s to other types of groups would mean expanding regulation in the future, since “we are going to be chasing this problem with money migration from one group to another...So until we are able to get more realistic limitations on contributions, are we not going to have the current dilemma that we have trying to chase the money from one group to the next and then play catch-up with regulations on the next group?” p. 55-56 Sen. Lott acknowledged this problem also, saying, “We may want to do more than this bill initially calls for.” p. 5 Sen. Dayton warned about the “law of unintended consequences”, saying, “to take this action as it applies to 527s and leave the door open for these activities to go elsewhere where we can identify in advance where that is likely to be, the 501(c)(4) or 501(c)(6), if that is the case it seems to me to be missing half the boat...So I would urge, Mr. Chairman, that we look at this comprehensively and look at the functions being performed that this bill addresses and rather than limit it to one particular category of the IRS or whatever that we apply it to any organization that is engaged in those purposes and apply that standard to them.” p. 59-60 What’s Next Sen. Lott expressed a desire to pass the bill on time for the FEC to implement its provisions for the 2006 election. Commissioner Mason said this would require changes in the FEC’s databases, which could take time, unless the allocation provisions are amended. He suggested the committee look at harmonizing the state and local exemptions so that 527 committees currently exempt from reporting the IRS because they only work on state and/or local elections and report to state and/or local election authorities would also be exempt under S 271. He noted this would avoid a new rulemaking proceeding at the FEC. p. 46 Although Sen. Lott wants to move quickly, it is likely the committee will be considering a series of amendments addressing issues raised at the hearing. Given Sen. Feingold’s repeated statements that the sponsors are open to changes, and the complexity of the issues, it may be impossible to move the bill by June.