A new disclosure law designed to clamp down on secretive, tax-exempt organizations that raise and spend millions of dollars to influence the outcome of elections is being hailed as a significant victory for campaign finance reformers. The law, which is the first important reform enacted by Congress in more than two decades, closes a tax law loophole, forcing stealth political organizations to disclose the source of their funding.
The loophole allowed so-called "section 527 groups" (named after a provision of the Internal Revenue Code) to wield their secret funds for partisan advertising, voter registration and get-out-the-vote campaigns, while artfully skirting federal campaign finance law restrictions. To avoid publicly reporting their contributions and expenses, these groups simply refrained from giving money directly to candidates and parties, and from using words like "vote for" and "vote against" in communications.
Clever tax lawyers created this loophole to enable wealthy donors to secretly influence elections. Donors to 527 groups have benefited by being able to give unlimited funds to affect campaigns while remaining anonymous and receiving big gift tax exemptions.
The result had been a growing profusion of new 527 groups expending tens of millions of dollars to influence the 2000 campaign. Examples include the prescription drug industry’s Citizens for Better Medicare, the Sierra Club, the Republican Majority Issues Committee and the infamous Republicans for Clean Air. A major contributor to Texas Gov. George Bush operated Republicans for Clean Air and bought ads that targeted Sen. John McCain (R-Ariz.) in the New York Republican primary.
The 527 bill rolled through the House and Senate on votes of 385-39 and 92-6. It proved impossible for anti-reform leaders like House Republican Whip Tom DeLay (R-Texas) and Sen. Mitch McConnell (R-Ky.) to effectively resist a demand to disclose secret money. President Clinton signed the bill into law July 1, 2000.
Federal officials and candidates have been major abusers of the loophole. For example, during the 1999-2000 election cycle, dozens of congressional and presidential candidates formed section 527 "State Leadership PACs" — political fundraising committees associated with federal candidates and officials — to attract unlimited amounts of soft money from corporations, unions and the wealthy. These candidates are prohibited from receiving such unlimited donations via their campaign committees and federal leadership PACs. Much of this money was being used to influence the 2000 presidential and congressional elections.
After the new law passed, lawyers for some of these candidates tried to protect their soft money slush funds by arguing that leadership PACs were exempt from the law because they already report to the Federal Election Commission. If true, this would have meant that they would not have to report their soft money receipts from polluters, tobacco companies, drug makers, HMOs, the insurance lobby and other industries. Public Citizen promptly wrote to the director of the IRS showing that this argument was contradicted by the law and existing FEC disclosure requirements, which do not cover state leadership PACs.
Soon the main authors of the Senate and House bills — led by Sens. McCain, Joseph Lieberman (D-Conn.) and Russ Feingold (D-Wis.), and Reps. Lloyd Doggett (D-Texas), Chris Shays (R-Conn.), Marty Meehan (D-Mass.) and Michael Castle (R-Del.) — wrote the IRS and Treasury Department. They emphasized that the position of the state PACs defenders was "unequivocally at odds with Congressional intent." On Aug. 9, the IRS issued a proposed ruling that upheld the Public Citizen and congressional reformers’ positions.