Tax Bill Could Offer New Way To Funnel Political Cash — And Make It Tax-Deductible

Dec 8, 2017
Originally published on December 8, 2017 6:57 pm

Wealthy Americans may get a new conduit for political money in the tax overhaul bill now being reconciled on Capitol Hill.

A small provision in the House version of the bill would let big donors secretly give unlimited amounts to independent political groups — and write off the contributions as charitable gifts.

"You not only get to help that candidate with a big contribution, it's not going to be publicized and you're going to be able to take a tax deduction on top of it," said Michael Franz, a political scientist, who analyzes political advertising with the Wesleyan Media Project.

The change would echo — or possibly dwarf — the influx of unregulated, undisclosed campaign money brought about by two Supreme Court decisions over the past decade. Those rulings permitted unlimited contributions to tax-exempt "social welfare" groups engaging in politics. The groups operate under Section 501(c)(4) of the tax code and don't disclose their donors.

The conservative Koch brothers network and other ideological warriors, on both sides, deploy social welfare groups. Their TV ads tend to be negative, even caustic, helping to make campaigns more divisive.

The tax overhaul bill offers a potentially much bigger loophole — one that political operatives will try to drive right through. It would politicize a different set of tax-exempt groups: 501(c)(3) charity organizations, through which donors can take tax deductions for their contributions.

"This is going to create, possibly, tax-deductible electioneering," Franz said.

The provision would repeal the Johnson Amendment — a bit of tax law from 63 years ago.

Lyndon Johnson, who later became president, was running for re-election to the Senate then. And two Texas millionaires were using charitable organizations to attack him.

So Johnson amended a tax bill with language to shut them down. It says 501(c)(3) groups cannot endorse or attack candidates.

Although the Johnson Amendment is almost never enforced, religious conservatives have been driving to repeal it, and President Trump is with them.

"I will get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution," Trump said last winter at the National Prayer Breakfast. "I will do that. Remember."

Repeal would allow clergy to promote or attack candidates from the pulpit. But it could have a downside for them, too.

"If religious figures can do outright endorsements of candidates, they will be pressured to endorse candidates," said professor Leslie Lenkowsky, who studies philanthropy at Indiana University.

As originally drafted, the repeal provision applied only to religious organizations. But House Republicans broadened it to apply to all 501(c)(3) entities.

"You know, we are on a slippery slope here," Lenkowsky added.

The IRS says there are more than 1.3 million charitable organizations – roughly 15 times more than all 501(c)(4) groups.

If the repeal provision becomes law, the IRS is in no condition to set strict rules. It's still crippled by a three-year controversy over its bid to regulate political social welfare groups.

It appears consultants could do what they did with social welfare groups: create new ones, with anodyne names, to funnel money from America's richest donors into the political system.

And all of it would be tax-deductible.

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MARY LOUISE KELLY, HOST:

Now let's look at another provision in the House version of the tax bill. This one would let churches and charitable groups engage in political activity. Advocates say it would promote religious freedom. But it would also give the wealthy new platforms for wielding political influence, as NPR's Peter Overby reports.

PETER OVERBY, BYLINE: If you were anywhere near a television in the past decade, you might have heard ads like these.

(SOUNDBITE OF MONTAGE)

UNIDENTIFIED WOMAN #1: Too dangerous to have real power over real people.

UNIDENTIFIED WOMAN #2: Oh, really, congressman? You voted for skyrocketing debt?

UNIDENTIFIED WOMAN #3: How can we afford this tax? We're already struggling.

UNIDENTIFIED MAN: Broken promises. Financial neglect. A dishonest campaign.

OVERBY: Messages from so-called social welfare groups, or as the tax code classifies them, 501(c)(4) organizations. Supreme Court rulings in 2007 and 2010 made 501(c)(4) groups valuable political vehicles. They're used by the conservative Koch brothers' network and other ideological warriors on both sides. Now the tax bill offers a potentially much bigger loophole, one that political operatives will try to drive right through. It would politicize a different set of tax-exempt groups - 501(c)(3) charity organizations. Political scientist Michael Franz says big donors would get an added benefit.

MICHAEL FRANZ: You not only get to help that candidate with a big contribution, it's not going to be publicized. And you're going to be able to take a tax deduction on top of it.

OVERBY: That's right. Big donors can already make unlimited secret contributions. Now they'd be able to write them off on their taxes. Franz the political scientist is with the Wesleyan Media Project, which has tracked political ads since 2010.

FRANZ: This is going to create possibly, you know, tax-deductible electioneering.

OVERBY: All of this stems from the potential repeal of what's called the Johnson Amendment, a bit of tax law from 63 years ago. Lyndon Johnson was running for re-election to the Senate. A couple of Texas millionaires used charitable organizations to attack him. He changed the tax law to shut them down. The Johnson Amendment says 501(c)(3) groups cannot endorse or attack candidates. That includes charities, nonprofit colleges and hospitals and churches. Religious conservatives have been driving to repeal the Johnson Amendment, and President Trump is with them.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT DONALD TRUMP: I will get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution. I will do that. Remember.

OVERBY: That was Trump last winter at the National Prayer Breakfast. Totally destroying the Johnson Amendment would do two big things. First, clergy could promote or attack candidates from the pulpit. But that would have a downside, too.

LESLIE LENKOWSKY: If religious figures can do outright endorsements of candidates they will be pressured to endorse candidates.

OVERBY: Professor Leslie Lenkowsky studies philanthropy at Indiana University. The other big thing repeal would do?

LENKOWSKY: You know, we are on a slippery slope here.

OVERBY: With 501(c)(3) groups, the political opportunities would be enormous. The IRS counts about 1.3 million charitable organizations, roughly 15 times more than all of the 501(c)(4)s. The IRS is in no condition to set strict rules. It was crippled by political controversy after it tried to regulate the political social welfare groups. If the Johnson Amendment is repealed, consultants could create new groups using anodyne names to funnel money from America's richest donors into the political system, and all of it tax-deductible. Peter Overby, NPR News, Washington.

(SOUNDBITE OF PETE ROCK'S "A LITTLE SOUL") Transcript provided by NPR, Copyright NPR.