Kausfiles Special

Everyone Was Wrong About McCain-Feingold!

We all missed a giant loophole in the law.

 I was wrong about the McCain-Feingold campaign finance reform law. The New York Times was wrong. Peter Beinart was wrong. And E. J. Dionne was wrong, too!

We all missed an important wrinkle in the new law—important because understanding it reveals a gaping hole in the bill, a hole the bill’s legal defenders (if you ask them) freely admit exists.

Necessary background: Along with many others, I criticized McCain-Feingold for banning last-minute TV and radio ads sponsored by nonprofit advocacy groups even when those ads were paid for by individual citizens (and not by profit-making corporations or unions). This ban, it seemed to me, violated the principle—embodied in the Supreme Court’s key Buckley v. Valeo ruling—that American citizens should be free to band together and spend their own money saying what they think about politicians when it matters most (i.e., just before an election).

It might be OK to restrict spending by corporations and unions, in this view. It might be OK to limit contributions to the campaigns of candidates. But if you want to spend your own money, independent of a candidate’s campaign, to express your views—well, it’s a free country. Or should be.

Here’s the wrinkle: It turns out the new law’s ban on last-minute ads only applies to corporations.  True, most nonprofit “advocacy” groups—such as the Sierra Club and the ACLU—are corporations. But (and this is the point I didn’t understand) they don’t have to be. It’s perfectly possible to form a simple unincorporated association and still get nonprofit tax status. (You just have to show that your articles and bylaws meet IRS requirements.) And if you’re not incorporated, then McCain-Feingold’s ad ban doesn’t apply.

Why is this important? Because during the McCain-Feingold debate, a great deal of fuss was made, by Sen. Paul Wellstone in particular, about the need to prevent last-minute ad campaigns like the one launched by Texas businessman (and Bush pal) Sam Wyly against John McCain on the eve of the Super Tuesday primaries. Wyly’s nonprofit group, calling itself Republicans for Clean Air, paid for $2.5 million worth of ads charging McCain with voting against clean solar and renewable energy. McCain was outraged, although in his version of the campaign finance bill he didn’t ban such ads. (McCain’s version only required that the ads be funded by individuals, not corporations, and that their sponsors be disclosed.)

But Wellstone argued that it was important to go further and have a provision ensuring  that groups like Wyly’s “can’t do this 60 days before an election.”  Wellstone successfully sponsored a provision that seemed to impose this ban. If it didn’t pass, Wellstone warned, “your are going to have a proliferation of these organizations. Republicans for Clean Air. Democrats for Clean Air. People Who Do Not Like Any Party for Clean Air.”

But now we learn that Wellstone’s provision (now part of the law) doesn’t actually stop Wyly. Wyly could still run his ads in future elections as long as his organization didn’t incorporate.  Republicans for Clean Air lives! And Democrats for Clean Air, and all the other possible permutations feared by Wellstone. Wyly could even get a nonprofit tax exemption.

True, Wyly (and his brother, who also seems to have contributed) would have to use their personal funds, not funds from a corporation. Their group would also have to disclose where its money came from. But there’s little reason to think either of these hurdles would have stopped the Wylys. They can almost certainly foot the bill for last-minute ads from their personal accounts—as can many rich and semi-rich Americans, especially if they join together in unincorporated associations. We can expect such unincorporated groups to spring up by the dozens, if not hundreds and thousands, in the first election after McCain-Feingold takes effect.

This is a big gap in the law—a “loophole,” in the sense that, thanks to this “unincorporated interest group” possibility, the McCain-Feingold bill won’t do what many of its backers, and many commentators, thought it would do. For example:

The New York Times was wrong to say, “The only thing the campaign finance reform law prohibits is spending in excess of federal campaign limits to pay for a campaign ad masquerading as something else.” In fact, the campaign finance reform law doesn’t prohibit that—as long as you don’t incorporate, you can spend as much as you want for a campaign ad masquerading as something else, even in the last 60 days!

Beinart and Dionne were wrong to defend the requirement “that organizations pay for such ads with hard money—that is, through a political action committee (PAC),” as Beinart put it. There is no such requirement for non-corporations.

Kausfiles was just as wrong to complain that, under McCain-Feingold, if “two or three, or 20 [semi-rich] people want to get together and form a nonprofit group to pay for an “issue ad” attacking George Bush, they are prohibited from spending more than $5G’s apiece.” They are only prohibited if they incorporate.

Does all this mean McCain-Feingold is constitutional because anyone can get around its most onerous provisions by simply not incorporating?

I don’t think so. The central issue, remember, is whether American citizens can get together to spend their own money on political ads, independent of the candidates’ campaigns, before an election. If this is speech—as it clearly is and as the Supreme Court seems to think it is—what’s the rationale for denying these citizens the ability to incorporate? Mainly the corporate form provides liability protection for the corporation’s principals—a handy thing to have if you’re starting a group designed to last a long time, which is why most big, influential nonprofits choose to incorporate. Telling them they can’t incorporate if they want to participate in pre-election debate seems an arbitrary penalty, like telling them they have to pay three times as much for postage or Xeroxing.

Another way to put the issue is this: Do the defenders of McCain-Feingold simply want to restrict political ads financed by for-profit corporations, as they tend to argue when it’s time to file briefs in court? Or do they really want to limit the speech of individual citizens who may be rich, as their rhetoric about leveling playing fields and “curbing the influence of money” suggests?

The latter sort of restriction runs head on into the First Amendment, as (rightly!) interpreted by the court in Buckley. The former restriction—on spending by profit-making corporations—is much more defensible. For-profit corporations typically don’t get their money by soliciting donations from like-minded citizens. They get their money from commerce with citizens who may disagree with them, the profits from which are then protected by the limited liability law. There’s an element of involuntary contribution when for-profit corporations are allowed to use their treasuries to interfere in elections.

But then why not limit the McCain-Feingold-Wellstone ban to for-profit corporations, and let ordinary citizens (even the slippery Wylys) form political nonprofits and enjoy the benefits of incorporating?

That may be where the law ends up. This is because there’s a key Supreme Court case (the Massachusetts Citizens for Life, or MCFLdecision) that seems to say just that—that citizens who formed a nonprofit corporation to distribute pro-life propaganda, and who didn’t take for-profit corporate money, not only didn’t have to limit the size of the individual donations they’d accept, they also didn’t have to abandon the corporate form.

 McCain-Feingold lawyers may try to sell the court on a narrow reading of MCFL that would restrict it to “small grassroots organizations” of the sort that raise money at bake sales—like the pro-life group involved in the MCFL case itself. (There’s some dumb language in the MCFL opinion that supports this reading.)  But why should citizens in “small” environmental or anti-abortion organizations have rights but citizens in larger organizations—i.e., organizations that might actually be effective in advocating the same things—not have those rights?

If the Supreme Court doesn’t whittle MCFL down to bake-sale nothingness, then Wyly and all the Wyly wannabes will also be able to incorporate before they spend millions from their personal fortunes on last-minute ads. If MCFLdoes get narrowed, then the Wylys of the world will just have to avoid incorporating before spending millions on last-minute ads. But, one way or another—incorporated or unincorporated—they will be able to spend what they want to say their piece.

As Wyly’s enemy McCain implicitly acknowledged—before Wellstone’s amendment mucked up his bill— that just seems like part of what freedom to speak means.

I hope this clears everything up!

Just in: David Broder’s wrong too! In his most recent column he describes McCain-Feingold’s effect:

If the Sierra Club or the National Rifle Association or any other interest group wanted to buy ads praising or criticizing a candidate for federal office in the weeks leading up to Election Day, it  … would have to solicit its supporters to make additional gifts … within the contribution limits.

Not if the interest group wasn’t incorporated!