What Would Happen if the Johnson Amendment Were Repealed?

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 In other words, what would happen if Congress simply repealed the portion of section 501(c)(3) quoted above?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.

Does the IRS Permit Churches to Endorse Candidates Through an “Alternate Channel”?

By Benjamin Leff

While we’re all waiting for one of my co-bloggers to say something smart about this, I thought I’d say a little more about campaign intervention by 501(c)(3) organizations.

Brian Galle asks by tweet, ” can we have a cite for the claim that a church cannot electioneer through a c(4)?”  In a prior post, I said, “The short answer is that IRS guidance on campaign intervention differs from its guidance on lobbying because it denies 501(c)(3) organizations who want to endorse candidates the ‘alternate channel’ that is provided for lobbying. And therefore current guidance is unconstitutional.” But I didn’t explain that claim. Furthermore, the D.C. Circuit Court seems to disagree with me, since it stated in the leading case on campaign intervention by a 501(c)(3) organization: “the Church can initiate a series of steps that will provide an alternate means of political communication that will satisfy the standards set by the concurring justices in Regan.”  So, here’s my justification for claiming that the IRS’s guidance is insufficient: Continue reading “Does the IRS Permit Churches to Endorse Candidates Through an “Alternate Channel”?”

Why the Constitution Protects Churches’ Right to Endorse Candidates

By Benjamin Leff

Last Sunday was Pulpit Freedom Sunday. With all of the speculation over Donald Trump’s tax strategies (personal and charitable), and then the publishing of the video showing Donald Trump saying terrible things, my Twitter feed had very little to say about pastors endorsing candidates from their pulpits. In fact, the news coverage has been surprisingly slim. But, all that notwithstanding, I thought I’d take the opportunity to finally explain why I think that the law does not prohibit pastors of tax-exempt churches (or leaders of any other 501(c)(3) organization) from communicating an express endorsement of a candidate in a regular meeting of the organization. I’ve mentioned this position in a number of previous posts here and here (and annoyingly to them I’m sure, on my friends’ Facebook feeds) and keep linking to a 2009 article I wrote on the topic. But who wants to read that?  The dominant argument against me appears to be that churches are free to endorse candidates or be tax-exempt, but not both, and forcing that choice is not a Constitutional problem.  But that argument is not an accurate description of the law, as I understand it (although, of course, I have to caveat that I’m a tax guy, not a Constitutional law scholar). Continue reading “Why the Constitution Protects Churches’ Right to Endorse Candidates”

Trump, Churches, and Politics – Counterpoint

By Benjamin Leff

A few days ago, my good friend and fellow Subgrouper, David Herzig, wrote a post about Donald Trump’s appearance at a church in Flint Michigan, the Bethel United Methodist Church. Herzig argued in his post (and on Twitter) that the interruption of Trump’s attacks on Hilary Clinton by the church’s pastor, Rev. Timmons, was necessary to protect the church from violating the prohibition on campaign-related speech by churches (and other charities). He also quoted Professor Lloyd Mayer’s tweet on the topic, arguing that the church could have violated the prohibition simply by permitting Trump to speak at all, regardless of the topic. I lamely tweeted back that the short video that had been released failed to provide sufficient facts to make a determination about whether the church violated the law or not. I want to say more about the law and the IRS’s current interpretation of the law to supplement Herzig and Mayer’s valiant efforts, since I think I have a slightly different view on the issue than either of them.

The most important point is that the Constitution protects all churches’ right to engage in speech (as well as religious practice). Statutory law — including the prohibition on campaign intervention (sometimes called the “Johnson Amendment”) — does not (could not) interfere with those very basic and fundamental rights. In my view, the IRS’s interpretation of the law gets some things a little bit wrong, but even its interpretation is extremely permissive of speech that takes place in churches and other charities in deference to their very real speech rights.

So, what’s the law with respect to hosting a political candidate at a church or other charity (including, by the way, a university)? Is it the case that any appearance by a known candidate at any event hosted by a 501(c)(3) organization is a violation of the law? Continue reading “Trump, Churches, and Politics – Counterpoint”

If Churches Really Want to Vindicate Their Right to Endorse a Candidate, It’s Easy for Them to Get into Court

By Benjamin Leff

Last week, attendees at the Republican National Convention applauded loudly when Donald Trump repeated his promise that if he’s elected president, he’ll work to end the ban on political-campaign activity by tax-exempt churches.  All 501(c)(3) organizations (including churches) have been prohibited from “intervening” in a campaign for public office for over half a century, and the arguments for and against the prohibition have remained remarkably consistent for decades.  Activists on one side call for an end to the ban, which they believe is an infringement on free exercise of religion or free speech.  Activists on the other side call for the IRS to actually enforce the ban, which they argue is being flouted by (mainly) churches who thereby distort the electoral process.  A long list of academics has written articles from a wide range of perspectives, proposing a wide range of solutions (including my contribution way back in 2009).  (I also spoke about this issue a few weeks ago in Australia, at a fabulous round-table at the University of Melbourne.)  As Sam Brunson pointed out on this blog in May, the IRS is “stuck in the middle.”

In his post, Sam pointed out that “Over the last eight years or so, the Alliance Defending Freedom has sponsored an annual event it calls Pulpit Freedom Sunday, in which pastors preach a sermon that expressly violates the prohibition, then send a copy of their sermon to the IRS. Of the possibly thousands of churches that have participated over the years, none have lost their exemptions.”  This is often presented as a dilemma for the churches: they want to get in to court, and are disappointed that the IRS won’t let them.

To me, this public stance on the part of the churches and Alliance Defending Freedom seems disingenuous.  If they really want to get into court, why don’t they just use the statutory procedures provided to 501(c)(3) organizations under the law?  Continue reading “If Churches Really Want to Vindicate Their Right to Endorse a Candidate, It’s Easy for Them to Get into Court”

Universal Basic Income and Marginal Rates

By: Benjamin M. Leff

Last week I posted some preliminary thoughts about a Universal Basic Income (UBI), arguing that it doesn’t make much sense to talk about a UBI outside the context of reforming the tax code, because a UBI without tax reform is just a mind-bogglingly large tax cut.  After the post, I got a tweet from Daniel Hemel about the effect of such reform on marginal rates: “Totally agree w/your UBI analysis, though to keep effective TR constant we would have to raise marginal TR on middle class.”  He’s right that to talk about a UBI in the context of fundamental tax reform without talking about marginal rates is silly.

First, a quick primer on marginal rates for non-tax readers.  Continue reading “Universal Basic Income and Marginal Rates”

Universal Basic Income “Arithmetic”

Benjamin M. Leff

Last week, Eduardo Porter wrote a column pointing out that there is some interest currently – both internationally and in the United States – in a “universal basic income” (or “UBI”).  Under a UBI, the government provides each citizen with an annual cash payout of a certain amount.  The idea appeals to thinkers on both the left and the right, for slightly different reasons.  Porter argues that it’s a bad idea for a number of reasons, but he argues that “the first hurdle is arithmetic.”  He then goes on to argue that the cost to provide a universal basic income of $10,000 each for 300 million American citizens would be $3 trillion (pretty simple math so far), and that is “nearly all the tax revenue collected by the federal government.”  So, obviously, a nonstarter.

Daniel Hemel, a brand new assistant professor over at University of Chicago blogging at Whatever Source Derived, does a little “back-of-the envelope calculation,” in which he points out how silly Porter’s arithmetic is.  It’s ridiculous to think of instituting a universal basic income without simultaneously changing the tax code.  If the tax code stayed exactly the same, then a universal basic income would either be a tremendously expensive social program or a tremendous tax cut for everyone, depending on how you want to look at it.  But Hemel points out that we wouldn’t keep the tax code exactly the same if we instituted a universal basic income.  Instead, we could probably cut the personal exemption and the standard deduction.  Who needs a zero tax rate if the first $10,000 you earn is a gift straight from the government?  You also don’t need the earned income tax credit or child tax credit, since the universal basic income is basically a refundable credit available to everyone.  Then, Hemel suggests cutting a bunch of other deductions to pay for the UBI, like the deduction for state and local taxes, the mortgage interest deduction, and some others, and he produces $1.119 trillion dollars of savings, which would fund a UBI of $3,450 per person.  Not the $10,000 per person that would completely eliminate poverty for any family with children and almost completely eliminate poverty overall, but not a bad start.

But Hemel hasn’t gone far enough either, because he hasn’t considered a complete overhaul of the income tax.  Continue reading “Universal Basic Income “Arithmetic””

Tax Benefits of Government-Owned Marijuana Stores

By Benjamin Leff

I promise that I think about things other than marijuana, but if you’re following my posts on this blog so far, there is little evidence of that.  In 2014, I published Tax Planning for Marijuana Dealers, which argued that sellers of marijuana could qualify as tax-exempt organizations under section 501(c)(4), which would enable them to avoid a draconian federal tax created by IRC section 280E.  This article inspired a thoughtful response by fellow blogger Philip Hackney, in which Phil argued that such organizations cannot qualify for tax exemption.  Among other things, he argued that that the so-called public policy doctrine applies to (c)(4) organizations just as much as it applies to (c)(3)s.  We replayed some of our disagreement about the breadth of the public policy doctrine last month on this blog (here, here and here).  But now I’ve posted a new draft article that addresses the application of the public policy doctrine to independent government entities that are exempt from federal income tax under IRC section 115 instead of 501(c). Continue reading “Tax Benefits of Government-Owned Marijuana Stores”

More on Charitable Organizations and Marijuana

By Benjamin Leff

Last Friday, Phil Hackney posted on this blog about IRS Denial 201615018 (4/8/16), in which the IRS denied tax-exempt status under section 501(c)(3) to an organization that planned to support the cultivation and distribution of medical marijuana in a state in which such activities were legal.  As Phil pointed out, the IRS held, among other things, that an organization whose purpose is the distribution of marijuana cannot be tax exempt under section 501(c)(3) because “a section 501(c)(3) organization cannot be created for a purpose that is illegal.”  This position is not new. The IRS took a similar position way back in 2012.

Phil and I pretty much agree about the law.  We both think that the IRS is probably right that under current law an organization whose charitable purpose includes engaging in illegal activities does not qualify for tax-exempt status under section 501(c)(3).  Phil says that the law is “absolutely clear on this front,” which I think is a little bit of an overstatement, but that’s a quibble at best.  The reason for this certainty is that the United States Supreme Court has held that an organization that had racially discriminatory admissions or dating policies could not qualify for tax-exemption under the so-called public policy doctrine, a common-law doctrine that applies to charitable trusts.  The argument for denying tax-exemption for illegal activities is a part of the public policy doctrine, the rationale being that nothing more clearly defines a jurisdiction’s fundamental public policies than its laws, and so illegal activities must violate public policy

Phil and I also agree on the “enforcement approach” that should ideally underlie the public policy doctrine.  We agree that when the IRS is called upon to apply the public policy doctrine, it should do so according to the brightest possible lines.  It should maintain “hard and fast” rules.  That is because the room for abuse is so great in this area, since the suspect organizations are almost always advancing unpopular or counter-majoritarian values.

Where Phil and I disagree is whether “illegality” provides an adequately bright line to satisfy this enforcement approach.  I think that even where conduct is facially “illegal,” there is ambiguity about whether it violates a fundamental public policy, and the IRS should hesitate before making a decision on that score.  When it errs in applying the public policy doctrine, it should always err in favor of the organization.  That is because when an organization’s conduct is illegal, there is always another enforcement entity that is empowered to enforce the law and prevent the illegal conduct.  The IRS should grant tax-exempt status and then defer to the substantive enforcement entity to use whatever sanctions are at its disposal to enforce the law … if it chooses to do so.

Continue reading “More on Charitable Organizations and Marijuana”

Introducing myself

I’m so happy to be a part of this group!  My name is Ben Leff and I’m a professor at American University’s Washington College of Law.  I teach the introductory Federal Income Tax class, as well as a class called the Law of Nonprofit Organizations.  I have also taught Tax Policy and Estate and Gift Tax.

In my writing, I focus on nonprofit organizations.  I think my interest initially came from my involvement in the student cooperative movement while a student at Oberlin College in the late 1980s.  I got interested in religious organizations and church-state relations as a Ph.D student of American Religious History at the University of Chicago in the mid-1990s.  Finally, while in practice in Texas in the early 2000s, I represented a broad range of tax-exempt organizations while they grappled with a number of interesting issues.

Most recently, I’ve been thinking about ways in which non-profit laws interact with “entrepreneurial” activities, both for social enterprises generally, and specifically in the marijuana industry.  I’m also really interested in the student loan industry, and am especially following the emergence of so-called “income share agreements,” and so may comment on that occasionally.

I’m also interested in tax policy generally, especially the ideological and philosophical underpinnings of tax fairness.  I haven’t written much about this topic to date, but hope to do so in the future.

I’ll be on sabbatical for the 2016-17 academic year, and will be an academic visitor at the Oxford University Law Faculty, researching British and EU law, and so will likely write posts about differences from across the pond as well.