How to Stop the Next IRS Scandal

The root of the recent scandal at the Internal Revenue Service (IRS)—in which the agency admitted to singling out Tea Party groups for special scrutiny—is simple: terrible campaign-finance laws. 

Here’s the story: The IRS must determine whether organizations applying for 501(c)(4) non-profit status—a classification that exempts you from paying taxes—meet the requirements. As election-law scholar Rick Hasen explains, the central criterion is that “campaign activity cannot be your primary purpose.” Unfortunately, the law gives the IRS little guidance in how it should determine whether this is a group’s “primary purpose,” and Congress has given the IRS insufficient staffing to really do the vetting properly. The shortage of resources was only made more dire by the explosion of these types of organizations after the Supreme Court’s Citizens United decision. What they apparently did in response to the avalanche of 501(c)(4) applications was to improperly use what seem to be partisan criteria for choosing which organizations to scrutinize, plus procedures that were a form of harassment

The solution to scandals like the current one is to take the IRS out of the business of vetting political organizations to begin with and to tamp down on the current proliferation of 501(c)(4)s. Rather than direct big money into organizations like 501(c)(4)s, campaign-finance law should allow unlimited donations to official party organizations and campaigns. This will allow the media and the public—rather than the IRS—to give big money the scrutiny it deserves.

The current state of affairs is the result of a 40-year-long whack-a-mole game. First, campaign-finance reform in the 1970s pushed large donations out of the campaigns and attempted to push big money out of the formal party organizations. But party lawyers figured out loopholes, and thus “soft money” contributions to parties were born. The McCain-Feingold campaign-finance law successfully pushed soft money out of the formal party organizations, so the parties responded by finding various forms of tax-exempt organization to function as, essentially, non-party parties. Eventually, in the most recent campaign cycles, that meant 501(c)(4)s, which have the particular advantage of not requiring disclosure of donors.

Hasen suggests that the way to stop this is for Congress to require disclosure for any funds that are used for campaign ads, regardless of what kind of organization is involved. That’s a fine idea, but I’m less optimistic than he is that it would solve the problem. It’s playing the same old game reformers have been playing for four decades: chasing money away from where it currently is. The problem with that approach is that big money just isn’t going to go away given the First Amendment as interpreted by the courts from Buckley v. Valeo on; it’s going to end up somewhere.

Here’s a better idea: Instead of trying to chase the big money away, resulting again and again in more obscure and more difficult-to-understand campaign structures, just let it return to where it makes the most sense to be: In the campaigns and in the formal party organizations. Lift the limitations on contributions. If someone wants to give a million dollars or three to a House candidate or $20M to the Republican National Committee, let ‘em. No ceilings at all. 

Won’t that mean the triumph of the rich? Not really, and certainly not more than we already have. The truth is that the political-science literature makes it clear that campaign money is subject to diminishing returns. Most of the money spent in the presidential campaign, or for incumbents in congressional races, is wasted. At any rate, that money is coming in, anyway; it just isn’t going to candidates or parties. Instead, political actors are forced to constantly shift how the parties are structured in order to stay one step ahead of campaign-finance laws. The result is that the only winners are entrepreneurs such as Karl Rove of Crossroads who set up these temporary quasi-parties, and the lawyers who get to figure out how to make it all legal.

However, by returning money to the parties and the candidates, it will make accountability a lot easier for everyone. The truth is even when we do know who is giving to these non-party parties, it’s been easy for candidates to avoid responsibility; they can claim they have nothing to do with those outside ads, and can even condemn them, all the while drawing the benefits. By allowing large—fully disclosed—donations, the system can make it easier for reporters and the public to see what’s going on. The current blizzard of parties, candidates, PACs, SuperPACs, and, 501(c)(4) organizations is a mess for anyone to keep track of. 

The assumption here is that if the law allowed unlimited contributions to the candidates and to formal party organizations, little incentive would remain to form the other outside groups, even if they were legal. We can’t know that’s true—but we do know that the rise of the outside groups was a direct consequence of laws that pushed money out of more direct support. My bet is that the outside groups would atrophy. Direct contributions are just far more efficient for everyone.

Good-government reformers, to be sure, don’t trust big money at all, although they’ve been quite ineffective in chasing it away for 40 years now. But they deserve something in a campaign-finance deal: partial public funding for House of Representatives general-election campaigns. Why House races? Those contests are where the market in campaign funding has failed spectacularly: It’s very hard to raise enough money in many districts for the out-party to run any kind of campaign. It’s true that some of the reason for underfunded challengers has to do with polarization in House districts, but it’s also true that even those districts deserve some kind of electoral competition. At the very least, the incentive of $250,000 or $500,000 to run a campaign should ensure that major party candidates file in every district, something which doesn’t always happen now.

It’s even possible that partial public financing could take the edge off partisan polarization. Currently, parties basically only play for seats where they have a natural ideological advantage, or where there’s rough ideological balance. But give Republicans in solid Democratic districts some funding, and perhaps it will encourage a moderate Republican party in that area. Meanwhile, knowing that there will be a candidate able to spend a little money should revive at least a little fear of general elections for safe incumbents—a very good thing in an era in which too many of them appear to only worry about primary contests. 

Floors-not-ceilings with strong disclosure is a campaign-finance approach that can work. It’s much easier to regulate than today’s complex landscape, thus making future regulatory scandals less likely; it promotes accountability; and it helps ensure minimally competitive House races without hurting competitiveness of other federal elections. If big money is inherently corrupt—and I don’t believe it is—then at least this plan makes that corruption visible. And it has the chance to be stable, which is good for healthy parties, and healthy parties are good for the political system. Most important, the IRS could get out of the business of regulating political campaigns. That’s something that everyone would like to see.

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