In the 1970s, significant legal changes in the field of campaign finance were introduced in the United States. However, the reforms made during that time left a few loopholes that ended up becoming popular workarounds. Let’s read on to find more.
Loopholes in Reform
When Congress established campaign contribution limits in Federal Election Campaign Act (FECA), it failed to index those limits for inflation. In 1975, a $1,000 contribution to a campaign may have seemed generous, but by 1990 $1,000 was a much more modest contribution, mainly due to inflation.
The fact that individual and political action committee (PAC) contribution limits were set at a fixed mid-1970s price became a functional problem in the 1980s and 1990s. While Congress reformed campaign finance several times in the 1970s, the political appetite for reforms had waned. PACs became an increasingly popular means to participate in campaigns. However, it was not enough.
As a way of avoiding the strict limits on giving directly to candidates, in the 1990s, many campaign donors began giving large amounts of money to the political parties and their satellite organizations. This became known as the soft-money loophole. Individuals, corporations, unions, and groups were effectively using political parties like a money-laundering operation.
The Republican and Democratic parties would take the contributions and redistribute them to candidates. The hard-money limits on donations from individuals and PACs became completely ineffective and reformers again began to cry for changes. The soft-money loophole used in the 1990s was an unintended consequence of the 1970s reforms. The FEC tried to strengthen state and national party organizations. But, in combination with a failure to increase the hard-money limits, the FEC wound up undermining the rules it was charged with enforcing.
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Bipartisan Campaign Reform Act
After a fair number of political mishaps and false starts, Congress finally passed new campaign finance reforms in 2002. The Bipartisan Campaign Reform Act, or BCRA, is often referred to as the McCain-Feingold Act, after the Republican and Democratic senators who championed the cause. The McCain-Feingold Act’s most important reforms addressed some of the biggest challenges in the system at that time.
First, it increased the hard money individual contribution limits to $2,000 per candidate for each primary and general election. It also increased hard money limits to $10,000 per PAC, and, importantly, indexed the limits for inflation so that they go up a bit each year.
Second, the act closed the soft-money loophole by strictly limiting the role that political parties can play in distributing money to candidates. The landscape of campaign finance changed quite a bit after the act was passed. Political parties were not filtering contributions anymore, and people gave more money directly to candidates.
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The 527 Groups
Without the soft-money loophole, people who had considerable resources to influence elections went looking for new means of doing so. In the early 2000s, influencers began using a little-known section of the federal tax code to set up a new type of organization aimed at contributing to elections. As a category, the groups became known as 527s, for the section of IRS code that regulates their activity.
A 527 group does not contribute money directly to a candidate, but rather raises money and spends it on advertising supporting or opposing an issue. The use of so-called issue ads became a popular way to participate in elections, without the restrictive confines that regulate PACs. Many groups established 527s and funded them through fundraising, then spent the money on campaign commercials, thinly veiled as public outreach or issue advertisements.
Ruling on Campaign Finance
In 2010, the campaign finance landscape experienced a seismic shift after a 5 to 4 Supreme Court ruling in the case of Citizens United v. FEC. The Court ruled that corporations, and by extension unions and other groups, could spend unlimited amounts of money on campaigning for or against candidates, so long as their efforts are not coordinated with the candidates themselves.
The Court reasoned that the free speech protections of the First Amendment give anyone, including corporations, the right to spend their money on elections. One can think of this as ‘outsider spending’, since it is not coordinated with candidates. On the other hand, anyone who coordinates with a candidate to spend money in a campaign is essentially acting as part of the campaign, and contributions would be subject to the hard money limits set by the FEC.
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Birth of the Super PACs
The big change with Citizens United was that by allowing corporations, unions, and groups to use their money in campaigns, a massive pool of money that was previously walled off from elections was now available. However, matters got more complicated later in 2010 when an FEC case known as SpeechNow.org v. FEC ruled that certain organizations do not need to disclose their donors.
With this ruling, 527s were no longer the most attractive vehicle for contributing to campaigns and the Super Pac was born. They are ‘super’ because they are not regulated under the same rules that traditional PACs are. A Super PAC is essentially an organization that can raise and spends unlimited amounts of money in a campaign in an independent format.
Common Questions about Loopholes in the Financing of Federal Campaigns
The donation of money to political parties and their satellite organizations as a way of avoiding the strict limits on giving directly to candidates in the 1990s was known as the soft-money loophole.
In the case of Citizens United v. FEC, the Supreme Court reasoned that the free speech protections of the First Amendment give anyone, including corporations, the right to spend their money on elections.
A Super PAC is an organization that can raise and spends unlimited amounts of money in a campaign in an independent format.