By Benjamin Leff
Donald Trump recently repeated his campaign promise to “totally destroy” the Johnson Amendment. The Johnson Amendment is that portion of Section 501(c)(3) of the Internal Revenue Code that forbids tax-exempt charities (including most churches) from “interven[ing] in … any political campaign on behalf of (or in opposition to) any candidate for public office.” Only Congress can change the Tax Code, and, as Daniel Hemel recently pointed out, congressional Republicans just re-introduced the Free Speech Fairness Act, a bill to permit some limited campaign-related speech by the leaders of 501(c)(3) organizations, including churches. I’ve written previously in support of this legislation as an “adequate solution” to provide a little extra wiggle room to protect the speech rights of charities without making significant changes to the way campaigns are currently financed. Hemel points out that the Free Speech Fairness Act doesn’t come close to totally destroying the Johnson Amendment, but is more like a “de minimis carveout.”
But, rather than talk about the relatively sensible Free Speech Fairness Act, I want to predict what would happen if Donald Trump actually succeeds in “totally destroying” the Johnson Amendment. In other words, what would happen if Congress simply repealed the portion of section 501(c)(3) quoted above?
Because a charity must be organized and operated primarily for charitable purposes (although the word used in the statute is “exclusively”[1]), and intervening in campaigns is not a charitable purpose, new charities could not be created for the purpose of engaging in campaign speech or making political contributions. But existing charities could divert a significant quantity of their funds to political campaigns if they so chose. The question of how much is hard to answer without new guidance, but it would be plausibly reasonable (though aggressive[2]) for a charity to make 49% of its expenditures in any year as campaign contributions, since that leaves 51% of its activities to satisfy the requirement that it is engaged “primarily” in activities that accomplish its exempt purposes.
How would that change the way campaigns are financed in the US? Well, if people could find charities willing to accept their contributions and then spend them on political contributions, taxpayers could transform political campaign contributions from nondeductible expenditures to tax-deductible charitable contributions. This would work for corporations as well as individuals. The charities would then have to limit their political spending to 49% of their overall spending. The charities best suited for this type of intermediation of campaign spending are large existing public charities.[3] For example, a university, like the one I work for, could choose to make political contributions on behalf of its donors, if it wanted.
If I were involved in fundraising at my university, I would immediately suggest that it create a fund called the Alumni for Kamala Harris for President Fund and the Alumni for Paul Ryan for President Fund (just a guess for 2020). For every tax-deductible contribution of $100 to the fund, $60 would go to the candidate or to an independent PAC that supports the candidate, and $40 would go towards scholarships at the University. There are some legal issues that the University would have to maneuver to make this program work, and there might be some blowback from stakeholders who were upset about the University getting involved in politics, but the program would not be illegal or impossible. As discussed below, for donors in the 39.6% tax bracket, a tax-deductible contribution of $100 costs about the same to them as a non-tax-deductible contribution of $60, so why not send $40 to scholarships at your alma mater, if it’s free (or, technically, paid for by the government)?
In the 2016 presidential election, total spending by Hilary Clinton, Donald Trump, the Democratic and Republican parties, and all Super PACS was just over $2 billion. There are almost certainly enough public charities in this country that would be tempted to raise funds in the manner described above that all $2 billion could be funneled through them, making all campaign spending tax-deductible for the donor.
So, would that be good or bad? Obviously, it has very little to do with whether churches or their leaders can or cannot endorse candidates from the pulpit. The question is whether it would be good or bad policy to permit all campaign contributions — whether to candidates directly or to independent PACs or political parties — to be made on a tax-deductible basis. Generally, a tax deduction functions like a government subsidy. On the one hand, subsidizing all campaign spending doesn’t seem so bad. Campaigns are important for democracy; why shouldn’t the government subsidize them? Under current law, the playing field is made level by denying tax deduction to everyone who makes a political contribution or spends money to elect a candidate. At first glance, it seems like the playing field would be equally level if everyone gets a tax deduction for similar spending. As long as everyone is treated the same, it seems like a fair system.
But everyone is not treated the same when political campaign contributions and campaign spending is tax deductible. First of all, most political campaign contributions are made by very wealthy taxpayers, and so subsidizing political spending is a subsidy for the wealthiest taxpayers. For example, the conservative Koch brothers were reported to have planned to spend almost 900 million dollars in the 2016 presidential election. The liberal donor Thomas Steyer reportedly spent over 86 million dollars. Even if the government subsidized such spending in an equal way, say 10 cents for every dollar spent, this subsidy would be unfair. The government would magnify the Koch brothers’ voice by 90 million dollars, Steyer’s voice by 8.6 million dollars and most Americans voice by nothing or almost nothing, simply because they make small contributions. Most people would think that even a subsidy that was delivered proportional to spending would probably be bad policy.
But a tax deduction is not proportional to money spent, because our Tax Code is not proportional. Tax deductions (including the deduction for charitable contributions) treat wealthier donors better than less wealthy donors. First, deductions for charitable contributions are only available to taxpayers who “itemize” their deductions. Under the current income tax system, 70 percent of taxpayers do not itemize; instead they take the standard deduction or do not owe any tax. If you take the standard deduction, your taxes remain exactly the same whether you make charitable contributions or not. If campaign contributions could be deducted like charitable contributions, then non-itemizers would not have any tax benefit from making campaign contributions, while itemizers would. Itemizers are disproportionately found among the highest-income taxpayers.
Second, the amount of benefit one receives from a deduction is equal to one’s marginal tax rate. Since tax rates are progressive, that means that higher-income taxpayers get more benefit from deductions than lower-income taxpayers. For example, single taxpayers who have taxable income over $415,050 pay tax at a 39.06% rate on their income that exceeds that threshold. That means that the ability to deduct a political contribution is worth 39.06 cents for every dollar contributed. It is like a federal subsidy of almost 40 percent to wealthy political donors. For single taxpayers (who itemize) with taxable income under $9,275, the comparable subsidy is only 10 cents for every dollar contributed. That’s what tax scholars generally call an “upside down” subsidy.
So, not only is deductibility a government subsidy for political spending that would go disproportionately to wealthy taxpayers, it would go to them in disproportionate amounts, providing a greater subsidy per dollar contributed to wealthier taxpayers than to less wealthy ones. It’s hard to imagine that there are many people who would interpret that dramatic tilt of the playing field in favor of wealthy donors a good thing. Not even Trump could sell a policy like that with a straight face.
[1] See Treas. Reg. 1.501(c)(3)-1(c)(1)(“An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3).” emphasis added.)
[2] It’s an aggressive position at least in part because the second sentence of Treas. Reg. 1.501(c)(3)-1(c)(a) states, “An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” A lot of negatives in that sentence, but it appears to interpret the opposite of “primarily” as “an insubstantial amount.” The idea that 49% of an organization’s activities is “an insubstantial part” is an aggressive position, to say the least.
[3] This post has been modified from its original form. It was originally published proposing that donor-advised funds would be the simplest vehicle for making tax-deductible campaign contributions. But, thanks to post-publication feedback about the likelihood that such use of donor-advised funds would still be improper even after a full repeal of the Johnson Amendment, I have changed the proposed vehicle for tax-deductible campaign contributions to existing public charities that are not donor-advised fund hosts.
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On my previous post talking about the the IRS’s announcement that it was putting a moratorium on issuing new regulations and formal guidance, a commenter asked if it was such an odd thing for a new Administration to temporarily pause guidance. After all, who wants to issue guidance before the new Administration’s people are in place and agenda is set, lest the new Administration change its priorities and positions in the coming months?
Today’s Tax Notes 
The Surly Subgroup 