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McCAIN MOVES TO CLOSE 527 TAX LOOPHOLE
June 7, 2000
WASHINGTON, D.C. -- In an effort to increase accountability and end the practice of political ads being paid for by secret donors, U.S. Senator John McCain (R-AZ) today introduced an amendment that mandates that the names of contributors to entities operating under Section 527 of the tax code be disclosed. Early this evening he delivered the following statement on the Senate floor:"Mr. President, this amendment would mandate that the names of contributors to entities operating under Section 527 of the tax code be disclosed. This amendment is simple. It is straightforward. It would impose no substantial burdens on any entity. And most importantly, it is constitutional and in no way infringes on the free speech of any individual or group.
"Mr. President, before I discuss this matter any further, I want to thank my colleagues Senator Lieberman and Feingold for all they have done to close this 527 loophole. They have been stalwarts in this effort and their hard work and dedication deserves note and praise.
"Mr. President, on May 18 of this year, USA Today stated:
'What’s happening? Clever lawyers for partisan activists, ideological causes and special interests have invented a new way to channel unlimited money into campaigns and avoid all accountability. Hiding behind the guise of “issue advocacy” and an obscure part of the tax law, nameless benefactors with thick bankrolls can donate unlimited sums to entities known as “section 527 committees,” beyond the reach of the campaign-reporting laws designed to curb such abuses.
'If the Chinese army had discovered this tactic first, its infamous contributions of 1996 would have been quite legal. It wasn’t supposed to be this way. Post-Watergate reforms a quarter-century ago required that all donations of $200 and more be publicly reported by name. There would be no more “hidden gifts” of $2 million and up like those that helped fuel the illegal activities of Richard Nixon’s re-election campaign. At least voters would know where a candidate’s political debts lay.
'But that is not the way the system has evolved. And today no one knows how many anonymous contributors are exploiting the loopholes in the law or how much these loopholes are adding to the swamp of money in politics.'
"Mr. President, USA Today sums it up well. This is dark, uncontrolled sector of the political landscape. It is a danger to our electoral system. And unfortunately, unless we act, the problem will only grow worse.
"The Associated Press reported on June 6:
'At crucial moments in the presidential campaign, George W. Bush has benefitted from millions of dollars in advertising paid for by mysterious groups and secret donors.
'Similar ads have also boosted Vice President Al Gore, but they generally were done by well-established organizations with clear agendas. Still, their donors remained secret, too.
'It’s a new form of political warfare that’s quickly becoming the tool of choice for people looking to influence Election 2000, made possible by a once-obscure provision in the tax code that lets anyone form a group and spend money on campaign-style ads without saying who’s paying for them.' [emphasis added.]
"Mr. President, this amendment in no way restricts the ability of any individual or organization from spending money to influence the political or electoral system. It protects free speech. But it recognizes that the public has a right to know who is speaking. It gives the American public an answer to the question raised by the AP story, namely, who is paying for these multi-million dollar ad campaigns.
"While the rhetoric of speech being protected is sometimes bantered around without much thought, it is not actually the speech that is Constitutionally protected, but the individual who is protected to speak his or her thoughts. Speech is not naturally occurring. It is not created of matter and therefore exists outside of the human realm. It is the individual who is protected. Under this amendment, the individual is protected. He or she can speak their will. But, again, I repeat, the public is given the right to know who is speaking.
"Mr. President, the 2000 federal election cycle has brought a new threat to the integrity of our nation’s election process: the proliferation of so-called stealth PACs operating under Section 527 of the tax code. These groups exploit a recently discovered loophole in the tax code that allows organizations seeking to influence federal elections to fund their election work with undisclosed and unlimited contributions at the same time as they claim exemption from both federal taxation and the federal election laws.
"Section 527 of the tax code offers tax exemption to organizations primarily involved in election-related activities, like campaign committees, party committees and PACs. It defines the type of organization it covers as one whose function is, among other things, “influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office . . . .” Because the Federal Election Campaign Act (“FECA”) uses near identical language to define the entities it regulates -- organizations that spend or receive money “for the purpose of influencing any election for Federal office” -- Section 527 formerly had been generally understood to apply only to those organizations that register as political committees under, and comply with, FECA (unless they focus on state or local activities or do not meet certain other specific FECA requirements).
"Nevertheless, a number of groups engaged in what they term issue advocacy campaigns and other election-related activity recently began arguing that the near identical language of FECA and Section 527 actually mean two different things. In their view, they can gain freedom from taxation by claiming that they are seeking to influence the election of individuals to Federal office, but may evade regulation under FECA, by asserting that they are not seeking to directly influence an election for Federal office.
"As we have seen in the past, they simply avoid using the infamous six words noted in the Buckley decision as a footnote, namely 'vote for, vote against, support, or oppose.'
"As a result -- because, unlike other tax-exempt groups like 501(c)(3)s and (c)(4)s, Section 527 groups don’t even have to publicly disclose their existence -- these groups gain both the public subsidy of tax exemption and the ability to shield from the American public the identity of those spending their money to try to influence our elections. Indeed, according to news reports, newly-formed 527 organizations pushing the agenda of political parties are using the ability to mask the identities of their contributors as a means of courting wealthy donors seeking anonymity in their efforts to influence our elections.
"Mr. President, there are some in this body who would fully regulate 527s under the FECA. This amendment does not do that. Let me repeat. While I would personally support such an effort, this amendment does not impose the burdens mandated under FECA to 527 organizations.
"Our amendment would, however, require 527 organizations to disclose their existence to the IRS, to file publicly available tax returns and to file with the IRS and make public reports specifying annual expenditures of over $500 and identifying those who contribute more than $200 annually to the organization.
"What could be more simple? What could be more fair, honest, and straightforward?
"The Washington Post recently stated:
'For years, opponents of campaign finance reform have been saying the disclosure is disinfectant enough. Don’t enter the swamp of trying to regulate the raising and spending of campaign money, they say: just require the prompt reporting of contributions, and let the voters perform the regulatory function at the polls.'
"And this is an argument made continually by my colleagues.
"On September 26, 1997, the Senior Senator from Kentucky stated in regards to contributor information reported by the Democratic National Committee:
'Disclosure would have been the best disinfectant.'
"On the same day, on the floor of the Senate, the Majority Leader stated:
'Why don’t we, instead, go with freedom, open it up, have full disclosure and let everybody participate to the maximum they wish.'
"I believe, Mr. President, this amendment is 100% in accordance with Senator Lott’s comments. Again, for the information of my colleagues: the amendment places no new restrictions of any kind on giving to so-called 527 organizations or how they spend their money; it merely mandates full disclosure.
"Senator Lott also stated on May 13, 1992:
'It seems to me that something that has that big an influence on an election, campaign election should at least be reported. Disclosure. That is the key. Let us always disclose to the American people where we are getting our money, where it is being spent. That is the answer.'
"On September 26, 1997, Senator Bennett stated:
'So, if you are going to look for a local example of something that works, you could say, based on my state’s experience that we ought to open the whole thing up and let corporate contributions come in as well as individual contributions. The one thing that we do have in Utah that has made it work is full and complete disclosure so that everybody knows that, if the Utah Power and Light company has given to X campaign, that is on the public record. And when the Governor goes to deal with utility regulation, everybody knows how much the power company gave him.'
"Under this amendment, 527 entities would disclose their contributors exactly in the manner Senator Bennett claims should be done.
"Senator Craig on February 24, 1998 stated:
'Instead [of McCain-Feingold] full and immediate public disclosure of campaign donations would be a much more logical approach.'
"To be fair, Senator Craig was referring to contributions to candidates. But we all recognize that political ads that run under the 527 loophole are designed to accomplish the exact same goal as candidate run ads: to elect or defeat candidates or causes, and as such, the contributors to 527's, like the contributors to candidates, should be immediately and fully disclosed.
"Mr. President, the clarion call for greater disclosure has been heard and it is time we acted.
"This amendment is not designed to give any one party any advantage over the other. As I noted earlier in my remarks, both parties are the beneficiaries of 527 expenditures.
"As the Washington Post editorialized:
'Both parties use these Section 527 committees. The failure to disclose is insidious, the ultimate corruption of a political system in which offices if not the office holds themselves are increasingly bought. At least, they could vote for sunshine. Or is the truth too embarrassing for either donors or recipients?'
"Mr. President, I have many times stood on the floor of the Senate and argued for the constitutionality of the so-called McCain-Feingold legislation. I strongly believe that campaign contributions should not only be disclosed, but that they can be constitutionally limited. Recent Supreme Court decisions affirm that fact.
"But, there was dissent noted in the most recent Supreme Court case on campaign finance reform. I want to note for the record that in Justice Kennedy’s dissent he stated: 'What the Court does not do is examine and defend the substitute it has encouraged, covert speech funded by unlimited soft money. In my view that system creates dangers greater than the one it has replaced. The first danger is the one already mentioned: that we require contributors of soft money and its beneficiaries mask their real purpose. Second, we have an indirect system of accountability that is confusing, if not dispiriting, to the voter. The very disaffection or distrust that the Court cites as the justification for limits on direct contributions has now spread to the entire discourse.'
"In his dissent, Justice Kennedy also points out that 'Among the facts the Court declines to take into account is the emergence of cyberspace communication by which political contributions can be reported almost simultaneously with payment. The public can then judge for itself whether the candidate of the officeholder has so overstepped that we no longer trust him or her to make a detached neutral judgment. This is a far more immediate way to assess the integrity and the performance of our leaders than through the hidden world of soft money and covert speech.'
"In his dissent concerning the same campaign finance reform case, Justice Thomas paraphrases the Buckley case and states 'And disclosure laws ‘deter actual corruption and avoid the appearance of corruption by exposing large contributions and expenditures to the light of publicity.’
"Based on the dissent issued in the Missouri case and what clearly was stated by the Majority, the kind of disclosure mandated by this amendment would not only be constitutional, but is clearly in the public’s best interest.
"Mr. President, this amendment is the right thing to do. It is not as comprehensive an approach as I believe is necessary to deal with the numerous problems associated with our current campaign finance system. I believe more needs to be done and intend to continue my fight with my good friend from Wisconsin, Senator Feingold to truly reform our campaign finance laws. But it is a simple, easy to understand solution to one specific problem that currently plagues our electoral system. It is a solution we can enact today. It is a solution to a problem that has just begun and one that is easily solved. I hope my colleagues will support this amendment."
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