Hearing of the Senate Rules and Administration Committee

HEADLINE: HEARING OF THE SENATE RULES AND ADMINISTRATION COMMITTEE

SUBJECT: THE SCOPE AND OPERATION OF ORGANIZATIONS REGISTERED UNDER SECTION 527 OF THE INTERNAL REVENUE CODE

CHAIRED BY: SENATOR TRENT LOTT (R-MS)

LOCATION: 301 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: PANEL I:

SENATOR RUSSELL FEINGOLD (D-WI);

SENATOR JOHN MCCAIN (R-AZ);

PANEL II:

LAWRENCE NOBLE, THE CENTER FOR RESPONSIVE POLITICS;

PROFESSOR EDWARD B. FOLEY, MORITZ COLLEGE OF LAW, OHIO STATE UNIVERSITY

BODY:
SEN. McCAIN: I just wanted to add to the question of Senator Stevens, certainly I don't think the court changed Buckley. I think they elaborated what Buckley meant with regard to express advocacy. Clearly they broadened what had come to be the understanding, and so our change was upheld as within Buckley, but it certainly did not overrule or change Buckley.

SEN. STEVENS: No. I didn't intend to say they overruled it. I believe they expanded it. And I think that, clearly the net is much wider for 527s than some people believe it is.

SEN. McCAIN: I think that's what the FEC needs to explore, and I think they need to take it seriously. And I think, as I indicated a few minutes ago, we cannot go after legitimate activity that is unrelated to politics of 527s. On the other hand, if a 527 is clearly a form for the express purposes of simply doing political activity, that's something the FEC has to take seriously in order not to circumvent the McCain-Feingold law. Thank you.

SEN. LOTT: Senator McCain.

SEN. STEVENS: Thank you again, Senator Feingold.

SEN. McCAIN: Thank you very much. Mr. Chairman, I'd ask that my complete statement be made part of the record.

SEN. LOTT: Without objection, it will be.

SEN. McCAIN: Mr. Chairman, thank you for holding this hearing today. In its recent opinion in McConnell v FEC, the Supreme Court wisely noted that money, like water, is going to seep away to leak back into the system. Now we see that and that's the subject of this hearing today. Now that the parties have been taken out of the soft money business, there are efforts by political operators to redirect some of that money to groups that operate as political organizations under section 527 of the IRS Code, or the so-called 527 groups.

Mr. Chairman, the game is the same. Groups are raising huge corporate and union contributions and multi-million dollar donations from wealthy individuals, and want to spend that money on so-called issue ads that promote or attack federal candidates, and voter mobilization efforts intended to influence federal elections. The tax laws say that a 527 group is a, quote, "political organization that is organized and operated primarily for the purpose of influencing the election of candidates." In other words, any 527 group is, by definition, in the business of political campaigns and it is voluntarily sought that tax advantage is conferred on political groups.

But these groups should not then be permitted to shirk their other obligation, including those under the campaign finance laws.

As Senator Feingold pointed out, they're not in violation of BCRA, they're in violation of federal election law of 1974. That law, as construed by the Supreme Court in Buckley v Valeo, requires any group that has a major purpose to influence federal elections and spends $1,000 or more to do so, to register with the Federal Election Commission as a political committee, and to be subject to the contribution limits, source prohibitions and reporting requirements that apply to all political committees.

That 527s have been allowed for years by the FEC to operate outside of the law is not surprising. You know, Mr. Chairman, I don't read many Supreme Court decisions, but in reading McConnell, the Supreme Court stated in no uncertain terms how we ended up in the soft money crisis to begin with. The justices placed the blame squarely at the doors of the FEC, concluding that the agency had eroded the prohibitions on union and corporate spending through years of bad rulings and rulemakings, including its formulas for allocation of party expenses between federal and nonfederal accounts.

In an extraordinary statement, Mr. Chairman, the Supreme Court stated that the FEC had, quote, "subverted" the law. Issued regulations that permitted more than Congress had ever intended, and with its allocation regime, invited widespread circumvention of FEC's limits in contributions. What we need today is the FEC to enforce the law the way it should be enforced, or the FEC should be dramatically restructured in a way that the laws were intended to, rather than act as some kind of political enabler.

The FEC has been wrong with respects to its treatment of 527 for years, and the agency needs to get its house in order fast and make clear that a section 527 group, a group that has voluntarily identified itself for tax law benefits as a political organization must comply with the federal election laws when its major purpose is to influence federal elections. These 527s need to play by the rules that all other political committees are bound by, the rules that Congress has enacted to protect the integrity of our political process.

Let me also say that the FEC in this rulemaking must change its absurd allocation rules, which should be the subject of another hearing. Under these rules, a committee that wants to manipulate the law can arrange its activities to suspend 100 percent soft money for voter drive efforts that obviously are for the purpose of influencing federal election. Indeed, one of the 527 groups operating today, America Coming Together, or ACT, has made overwhelmingly clear that its principal purpose is defeat President Bush, yet ACT recently filed a report with the FEC in which it claims that under the commission's existing allocation rules, it can fund its voter activities with 98 percent soft money. It's ridiculous and it makes a mockery of the law.

Mr. Chairman, you know, you get cynical over the years, but on the subject of this ACT, the lawyer for ACT is a Mr. Robert F. Bauer, who wants this 527 to be treated not as under the laws, and has been very outspoken, in fact, appeared in various media, in his advocacy of allowing the 527s to basically go unfettered by campaign finance law. Mr. Bauer, on May 26, 1999, in a filing to the attorney general of the United States, referral of potential criminal violations.

Mr. Bauer said, "On behalf of the Democratic Congressional Campaign Committee, I'm writing to bring your attention to potential serious violation of campaign finance laws. According to a recent article in Roll Call, several members of the Republican House leadership, including speaker Dennis Hastert and Majority Whip Tom DeLay, are engaged in efforts to establish an organization known as the Majority Issues Campaign." Mr. Chairman, I won't bother to read this, but he wants a criminal referral. Same guy now that's defending the 527s and trying to evade the law. I'll tell you, it's remarkable.

But anyway, Mr. Chairman, let me also say that many other organizations, though politically active, don't have partisan politics as their primary purpose. Section 501c groups, for instance, are prohibited by the tax law from having a primary purpose to influence elections. These groups operate under different rules.

It's tempting to see everything that's done in campaign finance reform through a partisan lens, and sometimes it's true that things are done with partisan ends in mind. But we all need to remember that what may seem in the middle of an election to be in the short-term political interest of one party is not necessarily a good thing in the long run for either party. I note that FEC Vice Chairman Ellen Weintraub opposed a rulemaking on 527 activity at this time, saying, quote, "At this stage in the election cycle, it's unprecedented for the FEC to contemplate changes to the very definitions of terms as fundamental as 'expenditure' and 'political committee,' sowing uncertainty during an election year."

Weintraub stated, "I will not be rushed to make hasty decisions with far-reaching implications at the behest of those who see in our hurried action their short-term political gain." What in the world role does Ms. Weintraub have to discuss political implications of anything. Ms. Weintraub's responsibility is to enforce the law and write regulations that enforce the law.

Mr. Chairman, this FEC is a remarkable organization. FEC's chairman Brad Smith's response to the McConnell decision was to say, now and-and to quote. I quote Mr. Smith. "Now and then the Supreme Court issues a decision that cries out to the public," quote, "We don't know what we're doing. McConnell is such a decision." This is the guy that's supposed to enforce the law upheld as constitutional by the Supreme Court of the United States. What an extraordinary statement from a public official.

It's statements like this, at this point, the need for fundamental reform of the FEC, I hope this committee will hold hearings on the legislation that Senator Feingold and I have introduced to do this. The FEC's current difficulty in dealing with an issue as straightforward as these 527 organizations spending soft money in the 2004 federal elections and the 3-3 ties at the commission when it recently considered an advisory opinion on this issue are only the most recent examples for the need for FEC reform.

Mr. Chairman, I believe that, if we allow these 527s to function, it will be, as the United States Supreme Court said, if we allow them to function outside of the FCRA, the finance campaign laws of 1974, not the BCRA, then I think we will be opening the door to a flood of unregulated soft money and we will have a return to the bad old days. And I hope that the FEC will act. I hope that this committee will make clear what the law is and what the law isn't and we are prepared, Mr. Chairman, if the FEC won't act, to go to court and make sure that these laws are enforced and that the 527s are brought under those laws because they clearly engage in partisan political activity. It's just a fundamental fact.

I thank you, Mr. Chairman, for allowing me to appear before you today and I would ask that this interesting letter from Mr. Bauer and his law firm, Perkins Cole, be included as a part of the record.

SEN. McCAIN: I believe that the Federal Elections Commission is supposed to act some time in April, I believe. Now they previously said they were going to act earlier than that. The statements by Ms. Weintraub in particular are very disturbing about not wanting to rush. My god, we've got an election coming up. We should rush so that we know exactly what the parameters are and give us a chance to go to court if the FEC doesn't act.

I mentioned, earlier in my statement, Mr. Chairman, extraordinary criticism on the part of the United States Supreme Court, the FEC, when the soft money-when you and I first ran for Congress, there was no such thing as soft money. There was no court decision. There was no law passed. It was the Federal Election Commission that opened the spigot and if they don't act in the FEC, they are going to allow the spigot to be opened called 527s. Look, I mean, the law prohibits anybody who is involved in partisan political activity to be outside the rules. As my 15-year-old son, Jimmy, would say, Duh, they are engaged in partisan political activities. They should be regulated.

I mean, it's so plain and yet, we have Mr. Smith say that he doesn't respect the United States Supreme Court decision and you have Ms. Weintraub saying, Well, I'm nervous because this might be a short- term political gain. As you pointed out, Mr. Chairman, if 527s are allowed to flourish, the Republicans are going to flourish and last time I checked, more rich people support Republicans than Democrats. And so, I don't know whether that's right or wrong. But one of the good things that's happened, there's been a reluctance on a lot of good and decent people to get into these 527s, number one.

But number two is both parties have increased individual donations by hundreds of thousands. I believe the Democratic Party is $600,000. I believe the Republican Party more than that. That's what we wanted. We wanted people to contribute in modest proportions so that they'd be part of the campaign. We weren't trying to borrow money for political campaigns. So my short answer to you is, it's plain as the nose on your face that these 527s are organized and engaging in partisan political activity. They should therefore be regulated under those rules.

I don't know what we should do if the FEC does not act, but I know one thing that we will do, we will go to court. Now whether we need to act legislatively, I think, is a decision that needs to be made at the time.