Think Tanks Have Little to Fear from New IRS Rules

Guest blogger David Earley of the Brennan Center argues that think tanks need not worry about proposed new tax rules limiting political activity by nonprofits. Transparify does not edit the content of guest blogs; the views expressed in this blog are those of the author alone, and may not reflect the views of Transparify.

In the wake of the Supreme Court’s 2010 Citizens United decision, political spending by social welfare groups has exploded.  These entities, organized under section 501(c)(4) of the tax code, spent 256 million dollars in the 2012 federal elections, even though they are supposed to be operated exclusively for social welfare rather than for political purposes. 

Due to legal loopholes, these organizations are not required to disclose their donors.  Consequently, individuals, corporations, and unions can anonymously funnel millions of dollars into elections without fear that their identities will be disclosed to the public. This deprives voters of information that would help them interpret the messages they receive before the election and allow them to make informed decisions at the ballot box.  And without full disclosure, the public cannot monitor for improper relationships between elected officials and their political benefactors, opening the door to corruption.

Recognizing this abuse of the tax code, the IRS recently proposed new rules to regulate political spending by 501(c)(4) organizations.  The rules replace the current, ineffective “facts and circumstances test” with bright-line standards, which benefits both nonprofits and the IRS by clarifying what constitutes political activity.  The IRS is also considering adding rules to significantly limit the amount of political spending that nonprofits can undertake.  Under current informal IRS guidance, nonprofits can spend up to 49% of their budgets on political activity without endangering their tax exempt status; new rules could greatly reduce this amount.  The IRS may also expand the restrictions to other nonprofit entities, such as 501(c)(6) trade associations and 501(c)(5) unions, which also engaged in significant political spending in recent elections.

The new standard for what constitutes political activity should also extend to 501(c)(3) charitable organizations. Because many think tanks are organized under section 501(c)(3), some in these organizations might think this is cause for concern.  However, since political activity by 501(c)(3)s is already prohibited entirely, it is unlikely that the new rules will have a significant impact on them – they already are forbidden from getting politically involved in elections.  So long as the IRS’s new rules properly define what constitutes political activity, 501(c)(3)s have little to fear.

The IRS should be applauded for moving to rein in political spending by nonprofit groups.  As the Brennan Center explained in its comments, “The nonprofit form was created to foster organizations that are devoted to the general welfare of their communities, not to furthering partisan political goals.  The proposed IRS rules are needed to help ensure that the nonprofit form is not abused by those who want to anonymously spend massive sums on elections.”

The proposed rules are not without their flaws.  For example, the proposed rules consider nonpartisan voter registration – an important type of social welfare work that should be exempt – to be political activity.  But these faults are a reason to refine the proposed rules, not to abolish them.  The IRS should implement new rules to protect the integrity of both our elections and the tax code.

David Earley is a Counsel at the Brennan Center for Justice at NYU School of Law, a law and policy institute that seeks to improve American systems of democracy and justice. The Brennan Center describes itself as “part think tank, part public interest law firm, part advocacy group, part communications hub”.