Slashing corporate taxes opens floodgate on 'dark money' ads

Slashing corporate taxes opens floodgate on 'dark money' ads
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President Trump is busy promoting the Republican tax proposal to cut the corporate rate from 35 percent to 20 percent. Whatever the effect on the economy and the deficit, a cut of this magnitude will likely have immediate and perhaps unintended effects of massively increasing the amount of political spending by nonprofit organizations that do not reveal their donors and raising unlimited funds under Citizens United. Unfortunately, federal campaign finance law is not a reliable enforcer of donor disclosure, both due to a relatively inactive Federal Election Commission and the permeability of the law as it currently stands. Some states have significantly beefed up their enforcement regimes, but others remain relatively lax.

Noting the gap, in 2000 Congress enacted an amendment to section 527 of the Internal Revenue Code, the section governing political organizations, encouraging (but not requiring) political entities to disclose their contributions and expenditures publicly through the Internal Revenue Service if they are not otherwise filing reports with a campaign finance authority. Amounts that are not disclosed are subject to tax. This amendment sits alongside an older provision in section 527 that taxes the political spending of primarily nonpolitical nonprofit entities, or 501(c) organizations. Both provisions rely on “the highest rate” of corporate tax.

A dramatic slash in the top corporate tax rate will have two effects on political spending. First, it will encourage the political spending of section 501(c) organizations, sometimes referred to as “dark money” groups when they engage in political activity. These organizations are taxed on political activity at “the highest rate” of corporate tax, capped by the amount of investment income they raise. For nonprofits with significant investment income, a cut in the top corporate tax rate would all but eliminate a very strong disincentive to engage in politics.

The effect of a lower corporate tax rate on the strategy of political organizations will be much broader. It could potentially reshape how money is raised and spent on campaigns at the federal level and in many states. This is because despite the wording of the amendment to section 527 that Congress passed when it intended to close the disclosure loophole, political organizations are not “required” to report their donors in any real sense. Instead, political organizations merely pay a tax on donors that are not disclosed. The IRS even provides instructions on how to list a donor’s name as “withheld” and calculate the resulting tax, again, at “the highest rate” of corporate tax.

Political organizations very rarely withhold donors currently because the 35 percent tax is simply too high. A cut in that rate to 20 percent, however, would lead a number of political organizations and their donors to conclude that withholding the names of at least some donors would be worth the price. The result would be political organizations that raise unlimited, undisclosed funds, pay a relatively small tax on those funds, and then spend all remaining funds on political ads.

This loophole could be closed by an FEC ruling that political organizations engaged in federal electoral activity should register and report under federal campaign finance law (which unlike the IRS system, requires mandatory reporting enforced by both civil and criminal penalties). But at the FEC, trends are cutting the other way, with half the current commissioners believing that a political organization need not register and report unless it is spending most of its funds on communications that “expressly advocate” for or against federal candidates, a standard that many organizations are deft at avoiding.

A large cut in the corporate rate, without action to preserve that rate as applied to political spending, will create a roadmap to raise unlimited amounts of undisclosed money, spend it all on political activity, and pay only a minimal tax. The result would be an eclipse on the sunlight of public disclosure of political spending.

Ezra Reese is a partner in the political law group of Perkins Coie, where he advises nonprofit organizations on lobbying and electoral activity.