On June 18, 2002 the Senate Finance Committee approved an amended version of the Charity Aid Recovery and Empowerment Act of 2002 (CARE Act) which contains a provision eliminating the distinction between direct and grassroots lobbying for 501(c)(3) organizations. OMB Watch has been working with the Charity Lobbying Expenditure Coalition to simplify and update the Internal Revenue Service (IRS) rules governing legislative lobbying expenditures by nonprofits exempt under Section 501(c)(3) of the tax code. Legislation that would have simplified the tax code by eliminating the distinction between direct and grassroots lobbying passed in a tax bill in 2000, but was vetoed by President Clinton for unrelated reasons. Eliminating this antiquated distinction would do away with the requirement that a charity spend no more than 25% of its allowed lobbying budget on grassroots lobbying (defined as appeals to general public asking them to contact legislators in support or opposition to specific legislative proposals). Grassroots lobbying expenditures would still count toward the overall budgetary limit, but 501(c)(3) organizations would be free to allocate their lobbying resources according the their needs, based on their best judgment. A major impact of the change would be to eliminate the need for separate recordkeeping for the two types of lobbying. The elaborate cost allocation rules for expenditures on mixed direct and grassroots lobbying messages would no longer be necessary. This would make compliance with IRS rules easier, and free staff time. The Joint Committee on Taxation submitted a report on tax simplification to Congress in April of 2001. It urged elimination of the direct/grassroots lobbying distinction, stating the proposal “would simplify the Code and regulations by eliminating a largely unnecessary, but burdensome, process of definition and calculation.” Another proposal, which is not part of the CARE Act, would adjust the sliding scale used to determine lobbying expenditure limits for inflation. Under the tax code the allowable legislative lobbying budget for 501(c)(3) organizations is determined by a formula adopted 25 years ago as part of Section 501(h), which established the expenditure test for measuring charity lobbying. The value of the set dollar amounts in the code has been diminished by inflation by nearly 66%, resulting in the gradual erosion of charities’ lobbying rights. For example, a charity with a budget of $2 million would see the following change: Current Scale 20% of first $500,000 = $100,000 15% of $500,000 - $1 million = 75,000 10% of $1-1.5 million = 50,000 5% of the remainder = 25,000 Total Lobbying Budget = $250,000 Proposed Updated Scale 20% of the first $1.5 million = $300,000 15% of $1.5-3 million = 75,000 ($500,000 remainder) Total Lobbying Budget = $375,000 The result would be a reasonable increase to reflect the impacts of inflation and, for smaller organizations, fewer steps needed to determine the limit.