The Myth of 527 Organizations

Abstract

527 organizations have been and continue to be an expedient medium for regulation of political activities. 527's have had a bad press, being commonly depicted as tax exempt havens through which big money may flow - outside of ordinary strictures such as those of the Federal Elections Campaign Act - into political campaigns. Thus regulation, such as that of the 2000 Act ... to require 527 organizations to disclose their political activities or The 527 Reform Act of 2005 now pending in Congress, is seen as necessary. Regulation of this sort falls on speech ordinarily subject to constitutional protection. However, inasmuch as a tax exemption is a public subsidy, Congress, it is thought, may here regulate free of ordinary First Amendment constraints, according to the axiom that Congress has no duty to subsidize speech. These suppositions respecting 527's are, however, misleading to false. 527 organizations are associations subject to taxation under Sec. 527 of the Internal Revenue Code. This section was enacted in 1975 not to exempt these associations from taxation but to identify and tax their income, which income usually consists of interest earned on deposited funds (dues and contributions). Dues and contributions themselves were not taxed, not because they were exempted from taxation but because these items - consistent with history, practice, and economic theory - are not income. Thus, 527's are not tax-exempt organizations, they do not feed at the public trough, and they should not be removed from ordinary First Amendment protection according to the axiom that Congress has no duty to subsidize speech. Also, 527's are not exempt from ordinary regulation, as that of FECA. Numbers of them are subject to FECA and routinely comply with its disclosure requirements. On they other hand, a number of 527's are not subject to FECA, not because they are 527's but rather because of First-Amendment driven limits (respecting issue advocacy and political committees) to the coverage of that Act. The First Amendment, then, is the loophole, not 527's. In the end, 527 is a neutral tax classification and a 527 organization is simply an association involved in electoral politics, local, state, or federal, that has over $100 in interest income on deposited funds. This includes smallish organizations, earnestly involved in advocacy of various sorts, from local school bonds to conservation issues. These 527's are not of the secret slush fund model offered for 527-based regulation. They are of the civic-minded, civic-building model that ordinarily enjoys First Amendment protection.