Free Money - loopholes in campaign finance laws

Reason, August, 2000 by James V. DeLong

The law also established the FEC to administer the system, write regulations, and implement myriad reporting requirements imposed on everyone who dabbles in elections. This has led to a numbing array of nit-picking rules. The FEC's Campaign Guide for Corporations and Labor Unions is 80 pages long, and the print is small. There are separate guides for party committees, for candidates, and for PACs. The FEC digest of court cases on the law decided between 1976 and September 1999 contains 328 entries. The list of FEC advisory opinions issued since 1977 totals more than 1,130. These concern issues such as whether companies may reimburse their employees for making campaign contributions (forbidden) and whether fathers may funnel dollars through their kids (also forbidden, but you can use your spouse, as long as both names are on the account and both sign the check).

Forbidden Words

The biggest regulatory challenges come from those areas that reformers call "loopholes" and others call the exercise of free speech rights. These fall into three categories: independent expenditures, soft money, and volunteer activity.

An independent expenditure is spending by someone outside a campaign that is not coordinated with the campaign. Advertising is the most obvious example, but the category also encompasses material such as voter guides. If these were classified as campaign contributions, it would be illegal for businesses, unions, and nonprofit corporations to make them at all. For individuals, their cost would count against contribution limits.

In 1974, Congress, acting just as a public choice theorist would predict, did indeed try to control independent expenditures. But the pesky Supreme Court would not agree. In Buckley, it read the statute narrowly so as to avoid constitutional problems (a tried and true legal technique), saying the prohibition of corporate expenditures "in connection with an election" extended only to contributions to candidates and "express advocacy," which meant ads using phrases like "Vote for Candidate X" or "Defeat Candidate Y."

"Issue ads" that present an argument and perhaps link it to a candidate but that stop short of express advocacy are not covered by the law. Similarly, other expenditures of all sorts are allowed as long as they are not coordinated with a particular campaign. A later case held that even express advocacy is protected if it is conducted by a nonprofit corporation and is not coordinated with a candidate's campaign. (A fortiori, this applies to individuals.) The FEC has moved to bring such spending into the system, though, counting donations to advocacy groups against limits on individual contributions to candidates and requiring extensive reporting.

After Buckley, groups with a stake in elections learned the arts of independent action and issue advocacy. Unions poured $40 million into the 1996 election, environmentalists use issue advocacy regularly, and various conservative groups depend on it. To reformers, this participation by groups that care about issues is a "loophole."