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. The McCain-Feingold election reform law actually doubles the amount of hard money an individual can contribute in an election.
Non-federal money is supposed to be used to elect state and local officials and is regulated by state laws. It is also used to 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 commonly becomes known as "soft money."
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 granted 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 narrowly defined what could be considered a candidate ad. The Buckley v. Valeo decision said that, for advertising to be regulated as solely influencing the election of a federal candidate, it had to "expressly advocate" the election or defeat of that candidate. This ruling, taken together with the FEC's tendency to broaden the range of activities that national party organizations could undertake with soft money, gave birth to party "issue ads." Such ads are clearly aimed to help or hurt a candidate, but never directly advocate the election or defeat of the candidate. As a result, parties began spending millions of soft money dollars on issue ads.
This combination of events 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 continuing to raise soft money at a record pace in preparation for the 2002 mid-term elections.
The key aspect of the Bipartisan Campaign Reform Act is a ban on those national soft money accounts. But the law doesn't go into effect until after the 2002 election.