Tax bill could make 'dark money' political contributions tax deductible

For the first time in American politics, anonymous "dark money" political donations could become tax-deductible. That...

Posted: Dec 8, 2017 3:41 PM
Updated: Dec 8, 2017 3:41 PM

For the first time in American politics, anonymous "dark money" political donations could become tax-deductible. That's if a provision currently being debated between House and Senate negotiators makes it into the final tax bill.

The issue at hand started with the "Johnson Amendment," named after then-Sen. Lyndon Johnson's 1954 measure that prohibits nonprofit groups who maintain tax-exempt status, including churches and charities, from directly participating in politics.

Congressional Republicans are negotiating a final tax reform bill

President Trump and Republicans want to end the "Johnson Amendment" blocking churches from operating directly in politics

The proposed change could be far more widespread, allowing donors to effectively deduct political donations for the first time

But efforts to repeal the Johnson Amendment have resulted in language that would ease political speech rules for all nonprofits. The results, critics say, could effectively let people deduct de-facto political donations and further hide those donations and spending from the public.

"This is taxpayer-subsidized "Citizens United,'" said Ian Vandewalker of the Brennan Center for Justice, referring to the 2010 landmark Supreme Court case that loosened campaign finance rules.

The House tax bill passed in November included a repeal of the Johnson Amendment, while the Senate did not. Currently, lawmakers are at work reconciling the two bills.

Opponents of the Johnson Amendment, including President Donald Trump and top evangelical leaders, say the law stifles religious freedom.

Speaking at the National Prayer Breakfast in February, Trump declared that he "will get rid of, and totally destroy, the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution."

Proponents of the Johnson Amendment describe it as an important bulwark that shields nonprofits and houses of worship from partisan politics.

According to Brendan Fischer of the nonpartisan Campaign Legal Center, the Johnson Amendment "protects charities and churches from some of the pressures associated with partisan political activity."

"Churches and religious organizations are currently free to engage in whatever kind of speech they want," said Vandewalker. "What this is about is about spending a large amount of money."

But repealing the amendment would have far-reaching consequences beyond the pew.

The original bill introduced in the House this year limited the Johnson Amendment repeal to "churches," but the language was changed in the House Ways and Means Committee to broaden the scope of the repeal to include all 501(c)(3) nonprofits, meaning every nonprofit would be able to endorse and support candidates and causes.

"The Johnson Amendment today infringes on the First Amendment rights of nonprofit employees -- whether they work at a charity, church or community organization," a spokeswoman for Ways and Means Chairman Kevin Brady, R-Texas, said in a statement. "This bill simply protects the Constitutional rights of those employees so they can speak freely on matters affecting their communities, including making candidate-related statements."

The change would also cost billions of dollars. The non-partisan Joint Committee on Taxation estimates the rule change would cost the US treasury around $2.1 billion over the next decade in lost revenue, assuming billions of dollars of political donations would be funneled through newly tax-deductible nonprofits.

Open to manipulation?

The language of the bill includes certain restrictions on how nonprofits can participate in politics. Political activity can only be made in the organization's "regular and customary activities," and the groups can only incur "de minimis incremental expenses." "De minimis" is a legal term for "minimal and inconsequential."

But critics say both restrictions are undefined and thus open to manipulation.

"'De-minimis' is not defined, which means that you could expect political operatives to push the envelope," Fischer told CNN. "The law's claim to apply very narrowly is effectively meaningless because the terms in the law are ambiguous and we know that the IRS is not going to enforce the law against political operatives that push the envelope."

According to Fischer of the Campaign Legal Center, if the rule change becomes law "then we as taxpayers would be effectively subsidizing these secret political contributions of the handful of billionaires that tend to fund our political campaigns."

One fear is the creation of "sham" charities and churches to hide dark money and allow for donors to claim their political donations as tax-deductible.

"Given what we know about the law, we think this would open the door to tax deductible dark money," Fischer said.

Tax-exempt political donations?

One of the outcomes of the Citizens United ruling was that politically-active nonprofits, or 501(c)4 groups, could accept unlimited anonymous contributions, so called "dark money." According to the Campaign Legal Center, at least-$800 million of dark money-has been spent since the 2010 Supreme Court ruling. With the repeal of the Johnson Amendment, donors could now shift their money into tax-deductible 501(c)(3)s.

"Donors will be able to give the money in secret but would also get a tax break for doing so. So they would be encouraged by the IRS to give this secret money in politics," said Vandewalker.

Another issue at play: the corrupting of existing nonprofits and churches.

With the new rules in place, billions would likely be diverted from Super PACs into charities. And that new money could come with strings attached. Donors would be free to make donations to a charity or religious organization contingent on the group supporting a certain piece of legislation or candidate.

"Any kind of deal, explicit or handshake, could be made and the voters would never know about it simply because there's no disclosure of where the money is coming from" said Vandewalker.

Tim Delaney, the chairman of the National Council of Nonprofits, describes the rule change as an "existential" threat to nonprofits.

"For the first time in history, it would make campaign contributions tax deductible. It will completely change American politics and certainly alter forever the independence of charitable nonprofits," Delaney said.

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