Nexus: Chapman's Journal of Law and Public Policy

Financial contributions to political campaigns come from a variety of sources from individuals to corporations, even foreign corporations. Since the Supreme Court ruling in Citizens United, it has been made clear that political contributions are a form of speech protected by the 1st Amendment of the United States Constitution and that this protection extends to fictional entities (i.e. corporations, non-profit organizations) just as it would to an individual. Without engaging a debate on whether these entities should be extended the same protections under the Constitution as individuals, the question that may be posed is, “What other restrictions can be placed on Campaign Contributions that would not be a violation of 1st Amendment rights?” It seems that Congress could use its taxation power to achieve a similar ends without raising the Constitutional issue as presented in Citizens.

The taxation involved in campaign finance touches on a variety of levels including the deductibility of donations from the donor’s income tax, the taxation of gifts, and the inclusion of contributions by the candidate. The tax effect at the various intervals also creates issues of disclosure stemming from the creative manipulation of the laws to move money from one donor to another. It is my contention that if Congress wants to restrict campaign contributions, this goal may be best effectuated through tax law.

As a general rule, political contributions are not deductible for income tax purposes. Contributions to political candidates, campaign committees, and newsletter funds are all included in the definition of political contributions. It is for this reason that taxable organizations and individuals do not have strong incentive to contribute to political campaigns because it is money that will be taxed. The effect on giving would be based on the income tax bracket of the taxpayer, therefore the higher marginal tax bracket the less money would be given. For instance, if a taxpayer were planning on giving $100 post-tax to a campaign and they were in a 28% tax bracket, then the taxpayer would likely give around $140 with the option to give pre-tax (taking a deduction.) Since, the law does not allow a deduction, these taxpayers look to charitable (non-profit) organizations to which contributions would be deductible. In turn, the charitable organizations make the contributions and the negative impact of giving directly to a campaign is circumvented by the taxpayer. Some charitable organizations do not qualify for the tax-exempt status and therefore contributions to the organization would not be tax deductible. However, an added perk or using this method of political funding is that the charitable organizations are in many cases not required to disclose by whom they have received funds. The anonymity incentive is yet another advantage for companies or individuals to make contributions without being exposed to the risk that may go along with the contribution. For instance, a privately owned company may want to make a contribution in support of a candidate that holds particularly controversial views. If the company’s support of those controversial views was publicly known, business may be adversely affected. Without anonymity, this company may not make such a generous contribution.

The second tax concern is the Gift Tax. The gift tax is applied to gifts in excess of an annual exclusion and subject to limitations by a lifetime exclusion limit. The purpose of the tax is to accompany the estate tax in achieving the goal of limiting the passing of wealth from one generation to the next, as some may put it, to prevent dynasties of wealth. It is worth considering in the realm of campaign finance because generally a gift (contribution) of this sort would be subject to the limitations of the gift tax and if this were the case; my prediction would be that much fewer political contributions would be given. However, the gift tax does not apply to contributions made to political campaigns or non-profit charitable organizations. It is my belief that the purpose of this exclusion is to promote the involvement of citizens in the political process and to promote charitable giving without restriction. Encouraging people to be actively involved in politics seems to be a noble cause. Certainly encouraging people to give limitlessly to charitable organizations is noble. Therefore, contributions of this sort are not subject to the gift tax and yet another possible hindrance to campaign contributions is circumvented.

Lastly and perhaps not as intriguing is the taxation of fund received by the candidates. As a general rule, funds received by political campaigns and used to fund campaign expenditures are not included as income to the candidate. This strikes me as fair because running a campaign is in essence a business venture. The funding the venture receives less expenses for that venture are all a part of doing business and should not be taxed. However, where there is an amount raised beyond the expenses of the campaign, this amount may be distributed to qualified organizations or to general government funds and maintain a tax exempt status. Otherwise, the amount is taxed to the candidate. Though there are surely many issues with the tracking of “qualified” expenditures within the campaign, this rule is relatively straight forward and in line with the general taxation principles of the tax code.

The first two categories stick out as having the greatest potential for Congressional regulation creating the largest effect on campaign contributions. By removing the tax exempt status on funds from a non-profit spent on political campaigns, the loophole advantage utilized by individual and corporate donors would be shut off and the $140 would again be $100. In addition, though not as practical, imposing a transfer tax (gift tax) on political contributions would provide a disincentive for contributions by all organizations including non-profits. Evening the playing field would likely limit expenditures and create greater disclosure. If the gift tax applied to contributions to all organizations, donors would be forced to disclose the recipient of the gifts when reported. The goal of this commentary is not to say that campaign contributions should be limited, but simply that there are existing, constitutional means of achieving this objective. If it is necessary to limit campaign spending, Congress has the tools to do so using its taxing power. In the interest of campaign fairness, disclosure is a major issue and reform in this area will undoubtedly raise even more constitutional issues. As mentioned, use of the gift tax may aid in the disclosure issue, but would likely be challenged as to its validity concerning the 1st Amendment and privacy. A part of freedom of speech may be to give without public disclosure. However, on the same token, maybe people should stand behind their speech or be silent. The fear then is that no one speaks at all.

http://lawprofessors.typepad.com/nonprofit/2010/11/nonprofits-elections-disclosure-the-gift-tax-and-more.html