Shays-Meehan opens soft money loophole in the States

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If the campaign finance reform bill that passed the House becomes law, it will eliminate a colossal loophole through which corporate, labor union and individual political donors poured nearly a half-billion dollars in "soft money" into national party coffers in the 2000 election cycle. At the same time, it would open another loophole that will allow the state affiliates of the Democrat and Republican parties to attract some of that money.

Last month, the House of Representatives passed Shays-Meehan, a sweeping campaign finance reform bill that would ban soft money at the national party level, limit controversial “issue ads” and raise hard money contribution limits to candidates. The bill also contains a little-noticed provision—some say a loophole—that gives state party committees the opportunity to raise soft money in support of party building activities that may also help federal candidates.

That is especially true for party committees in the 14 states that allow unlimited contributions from corporations, or in the 19 states that allow unlimited contributions from labor unions.

“It certainly appears to me that [Shays-Meehan] opens up a rather unique opportunity for the states to step in and fill a breach,” said former Florida Republican Party Chairman Tom Slade.

With few restrictions on corporate and union giving to state parties, states like Florida, Virginia and Illinois could take a more prominent role in national politics. By contrast, states that ban corporate and union contributions, like Ohio, Michigan and Pennsylvania, would not.

Under current law, corporations and labor unions are barred from giving directly to political campaigns. Individuals can give no more than $1,000 to a candidate in the primary, and another $1,000 during the general election. However, contributors can give unlimited contributions to “non-federal” accounts of political parties. The non-federal accounts are used to fund state and local election activities.

To give one recent example, Enron Corporation, the embattled energy trading firm, made two $100,000 contributions directly to the non-federal accounts of the Republican National Committee and the Democratic National Committee on Nov. 26, 2001—just a week before the company filed for bankruptcy. Under Shays-Meehan, Enron and other corporations, wealthy individuals and unions that were writing six-figure checks to the national parties will be barred from making such contributions. Inevitably, the state parties will become increasingly attractive alternatives for donors attempting to influence elections.

Regardless, the current legislation is the most aggressive attempt to reduce the corrupting influence of big money in national politics in a quarter century. The soft money ban at the national party level is the centerpiece of Shays-Meehan and its Senate companion, McCain-Feingold.

While the legislation effectively shuts off unlimited soft money contributions at the national party committee level, Shays-Meehan includes a complicated and carefully constructed provision that allows state and local parties to spend a limited amount of soft money that affects federal elections.

Opponents of Shays-Meehan say the exemption is not narrow, but is a major loophole that will allow tens of millions of dollars of soft money into the system through the back door. But not all state party committees will be able to take full advantage of the exemption because of the varying campaign finance laws in each of the 50 states.

“My feeling from the start was, if you do reform at the top, you’re going to see a lot of action at the state level right after that,” said Raymond La Raja, a political scientist who studies reform at the University of Massachusetts. “There are 50 different (campaign finance) laws that can be tested.”

No more soft money

The act would eliminate those soft money accounts at the national level altogether. But a ban at the national level without some restrictions at the state level would leave a gaping hole. The states, many of which have no contribution limits and no restrictions on contributions from corporations and unions, could simply fill the soft money role of the national parties.

Initially, McCain-Feingold addressed the problem by banning state and local parties from spending any non-federal money that would affect a federal election. But Senator Carl Levin, a Democrat from Michigan, stepped in and attached an amendment that creates a new soft money loophole. The loophole was widened when the House attached an amendment similar to Levin’s in Shays-Meehan.

The amendment, aimed at keeping state party organizations healthy, creates a whole new class of campaign funds. It allows state parties to fund generic voter registration and get out the vote activities that may affect a federal election, but prohibits them from spending money on issue advertising. But there are limitations. The party committee may accept no more than $10,000 per source for these activities, and only if that amount doesn’t exceed state contribution limits.

A state party will have to keep its state money, federal money and “Levin money” in separate accounts.

“It will probably mean we will set up completely separate committees that will be in charge of federal elections and nothing else,” said Bob Bennett, long-time chairman of the Ohio Republican Party. “I’ve got to create a different account. I’ve got to restrict that money.”

Bennett opposes Shays-Meehan because he says it gives independent groups-which don’t face the same level of disclosure requirements that parties do-much more influence over elections.

There are some other restrictions on how the “Levin money” can be used, all designed to avoid what happened at the federal level with soft money. The new class of contributions can only be spent when there is a matching amount of hard money (the ratio is to be determined by the FEC). Receipts and disbursements must be disclosed to the FEC. The contributions cannot be transferred between states. And each state committee has to raise its own hard money to match the Levin money. The national party committees won’t be able to transfer hard money to the states to take advantage of the new funds.

Of great potential significance is a subtle change in the House version that may lead to the creation of an unlimited number of new local party committees that could accept those $10,000 donations. The House amendment in the Shays-Meehan bill removed a date restriction from Levin’s original Senate amendment. Under the Levin draft, only party committees in existence at the date of the enactment of the campaign finance reform bill would be allowed to raise Levin money, according to an analysis by the Campaign Finance Institute. Shays-Meehan detractors, like Republican Representative Bob Ney of Ohio, said the Levin amendment amounted to a “$30 million loophole”—and that was before the House passed its version, which broadens it. While that may be an overstatement, it is clear that state parties with looser contribution limits will be able to receive much more “Levin money” than states that do not.

Levin money is not supposed to be used to pay for issue ads, but La Raja questioned what would prevent a corporation from making a six-figure contribution to a state party, and the state in turn donating the money to an independent group to spend on issue ads. In fact, Shays-Meehan includes numerous restrictions on issue advertising, but most experts believe the issue ad language will be struck down by the Supreme Court, should the bill become law.

“My personal feeling is the issue ad (provision), that’s not going to fly in the Supreme Court,” La Raja said.

This raises another issue of interest to the states. In past elections, national parties have used soft money to pay for issue ads. Since Shays-Meehan bans soft money at the national level, that won’t happen, even if the Supreme Court knocks out the issue ad provision. But it appears nothing would prevent states from then doing the same thing.

Meanwhile, political consultants, lawyers, party operatives and lobbyists are in a race to find ways around the legislation.

“Somebody told me once, today’s ban is tomorrow’s loophole,” Slade of Florida told the Center. “From a practical standpoint I think we’re going to have to wait until the president signs something and a bunch of smart lawyers find out where the loopholes are.”

State party limits

Fourteen states allow unlimited corporate contributions to state parties:

1. Arkansas

2. California

3. Florida

4. Georgia

5. Idaho

6. Illinois

7. Maine

8. Missouri

9. Nebraska

10. Nevada

11. New Mexico

12. Oregon

13. Utah

14. Virginia

Nineteen states allow unlimited union contributions to state parties:

1. Alabama

2. Arkansas

3. California

4. Florida

5. Georgia

6. Idaho

7. Illinois

8. Iowa

9. Maine

10. Mississippi

11. Missouri

12. Montana

13. Nebraska

14. Nevada

15. New Mexico

16. Oregon

17. Tennessee

18. Utah

19. Virginia

A soft money primer

The federal/state split

Campaign funds in the U.S. political party system are divided into two categories—“federal” and “non-federal.” Federal “hard” money is spent on campaigns for federal office. Contributions are limited and disclosed.

Shays-Meehan would actually increase the amount of hard money an individual can contribute in an election.

Non-federal money is used to elect state and local officials and is regulated by state laws. It is also used fund the “grass roots” activities of political parties. Since it is not regulated at the federal level, non-federal money is not supposed to be used to influence federal elections. When it is used for that purpose, it is commonly known as “soft money” because it is not subject to the “hard” limits of federal law.

Soft money was born in 1978 when the Federal Elections Commission gave the Kansas Republican State Committee permission to use corporate and union funds (both legal under state law) to pay for a voter drive benefiting both state and federal candidates. The FEC allowed the state party to use a combination of federal money and non-federal money to pay for the drive.

The exemption was approved with good intentions. Following the post-Watergate campaign finance reforms, many state party committees became strapped for cash. The reforms made it more difficult to raise money for traditional party building activities —like voter registration drives —that inevitably benefit both state and federal candidates.

The national party organizations, like the Democratic National Committee and the Republican National Committee, began setting up non-federal accounts of their own. The accounts allowed corporations and labor unions to make unlimited contributions to national parties, something that is strictly illegal under the hard money system.

In addition, a 1976 U.S. Supreme Court opinion gave the parties a new way to spend that money— and it had nothing to do with helping local parties stay healthy. The Buckley v. Valeo decision said that for advertising to be regulated under federal rules, it had to “expressly advocate” the election or defeat of a candidate. The express advocacy definition was narrowly defined, and allowed for a whole new form of advertising that clearly aimed to help or hurt a candidate, but is not covered under Federal Election Commission guidelines. As a result, parties began spending millions of soft money dollars on issue ads.

This combination of events has led to the soft money boom of the 1990s.

In the 2000 presidential election, Republicans raised over $244 million in soft money, an increase of over 73 percent over the same period in 1995-96. The Democrats raised over $243 million in soft money, a 99 percent increase. And both parties are on track to eclipse all existing records. Common Cause reports the parties have already raised $160 million in preparation for the 2002 mid-term elections.

Shays-Meehan, which doesn’t go into effect until after the day after the 2002 election, won’t touch that money. It will ban it for future elections, however.

“I think what’s the important thing to sort of keep focused on, what we have done, we have broken the nexus between big money donors and federal politics,” said Celia Wexler, a senior policy analyst for Common Cause. “That’s the most important part of this.”