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Panel Mulls Life After 527s

Even as Senate Rules and Administration Chairman Trent Lott (R-Miss.) promised quick action on a bill to rein in 527 groups, much of the testimony at a hearing Tuesday focused on where the money would go if such legislation passes.

The panel is considering legislation that would subject the independent political organizations to contribution limits and disclosure requirements, as well as putting them under the purview of the Federal Election Commission. The measure’s sponsors are seeking to eliminate the use of section 527 of the tax code as a way to raise and spend unlimited sums of money to influence federal elections.

The three panels of witnesses were in almost universal agreement that money currently routed through 527s will simply find another place to go. While the experts differed on where, and on possible solutions, the underlying assumption was virtually unchallenged — that what Lott has referred to as “sewer money” will seep back into the system even with this bill.

The nonpartisan Campaign Finance Institute’s Michael Malbin testified that, if unchecked, “527s will likely come to look more and more like the old soft money,” and with that comes the “nexus of reciprocity” that made soft money so infamous before the enactment of the Bipartisan Campaign Reform Act in 2002.

Malbin said he believes this nexus exists even though BCRA prohibited federal candidates from raising soft money, as 527 groups have so closely aligned their messages with the national parties that policymakers know who butters their bread even if the money is not directed through the parties.

That is precisely the link that BCRA sponsors Sens. John McCain (R-Ariz.) and Russ Feingold (D-Wis.) were seeking to eliminate. And although they ultimately blame the FEC for allowing 527s to use soft money to influence the 2004 elections, they, too, acknowledge that the process of keeping unlimited sums of such money out of federal elections will likely be an ongoing process. (The majority of FEC commissioners who voted against subjecting 527s to contribution limits in the previous cycle deny that they had the statutory authority to do so.)

“We’re going to play catch-up on where the money goes,” said Sen. Ben Nelson (D-Neb.), who sits on the Rules panel.

FEC Commissioner David Mason, a Republican, acknowledged as much, testifying that the bill, S. 271, is relatively limited in scope.

“One disturbing aspect of this feature is the general acknowledgment that this proposal is, in fact, just one limited step in what reform advocates hope will be a continually evolving statutory and regulatory structure for” — in the words of Brookings Institution scholar Thomas Mann — “‘continually managing the problems of money in politics, not definitively solving them.’”

Mason, speaking for himself and not for the FEC, was not neutral on that point. “However threatening some find the political activities of [non-FEC] registered organizations, I do not find the prospect of a continually expanding gyre of political regulation a healthy prospect either.”

The most widely discussed alternative to 527s as a conduit for soft money was nonprofits that operate under section 501(c) of the tax code.

“Just as under BCRA a significant amount of soft money moved from political parties to 527 organizations, under S. 271 a significant amount of money would move from 527 to 501(c) organizations,” Mason said.

He called this effect predictable because 501(c) organizations may conduct voter-registration drives, lobby and even make political expenditures (subject to certain tax consequences) — all without disclosure. “It may still be worth doing,” he said of the 527 legislation, “but in that process you’re going to lose disclosure.”

Indeed, many nonprofits are concerned their groups will be the next target of legislation to limit the influence of large donors on federal elections. More than 170 nonprofit organizations signed an open letter to Congress stating their opposition to the McCain-Feingold-Lott bill on grounds that it threatens outside participation in the democratic process.

The measure’s first two sponsors testified adamantly that the groups are not the targets of their efforts.

McCain emphasized that the legislation was meticulously drafted to apply only to 527s. “It says explicitly that it does not apply to 501(c) groups. The 527s, by definition, are engaged in partisan political activities, that’s why they are in that category; 501(c)s are not engaged in partisan political purposes, and that’s why they are in that category,” McCain said.

Frances Hill, who teaches tax and election law at the University of Miami School of Law, seemed to back up McCain on this point. “I don’t see any danger to a properly administered 501(c)(4),” Hill said, adding that 501(c)(3)s have even more protection.

Under the tax code, Section 501(c)(3) organizations may not participate in or seek to influence any political campaign. Section 501(c)(4) groups cannot be organized for the primary purpose of influencing the outcome of elections. The legislation the committee is considering would put 527 groups under the definition of political committees for the purposes of regulation by the FEC. So, according to Hill, a section 501(c)(4) organization that falls within the definition of a political committee under campaign finance laws “simply cannot exist.”

She said the bill is a measured and reasonable approach to connecting tax and campaign law. But she added: “It’s always difficult to know how creative legal advisers are going to be.”

Prominent Democratic campaign lawyer Robert Bauer almost immediately validated her point. “Without tipping my hand or those of others who are professionally creative, the money will find an outlet,” he testified.

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