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June 1998 – Corporate Buyout of Elections

June 8, 1998


Through both legal and illegal means, North Carolina businesses have spent more than $7 million to influence the outcome of elections in the past three years.

State law allows corporations to make “soft money” contributions to the national parties, donate to referendum committees, and pay for certain issue ads that name candidates. But a 1931 state law bans corporations from “directly or indirectly” contributing to candidates and state parties or engaging in “any political purpose whatsoever.”

The state Republican Party and many Republican legislators want to abandon the 67-year-old ban, which one federal judge says is too broad; but House and Senate Democrats have proposed bills to modernize the law to make it both constitutional and more effective.

To understand what’s at stake, Democracy South reviewed several ways corporations already influence elections in North Carolina and several U.S. Supreme Court decisions that address restrictions on the political activity of businesses. Here’s what we found:

Soft Money. North Carolina companies sent $3.4 million in “soft money” donations to national Democratic and Republican party committees from January 1995 to December 1997, according to research by Democracy South.

That amounts to 46 percent of the $7.3 million sent by North Carolina donors to all soft and hard money accounts of the national parties for 1995-1997.

According to testimony at the state Board of Election hearings last month, much of soft money from businesses filters back to North Carolina after it is “laundered” or replaced with individual donations from other states.

For example, Speaker Harold Brubaker raised more than $250,000 for the Republican National Committee (RNC), including $100,000 from two German-owned companies in Randolph County and $100,000 from Glaxo Wellcome. Within weeks of depositing those checks into a soft-money account, the RNC sent $171,100 from another account to the Brubaker-controlled Randolph County Republican Executive Committee.

Is this laundering operation legal? Democracy South continues to seek a full investigation of these transactions, but to date the Randolph County District Attorney has not acted on our June 1997 request. Speaker Brubaker and his fundraisers, Paul Shumaker and Mark Stephens, told the Board of Elections in May 1998 that there was no formal agreement that money raised for the RNC would be matched with money returned to a Brubaker-controlled committee. But they testified that they expected some money back, and their 1998 fundraising plan continues to reflect a pattern of corporate money being sent to Washington and RNC money returned to the Randolph County GOP.

The absence of a written agreement to launder corporate money may undercut a charge that business funds were illegally routed to “indirectly” support a candidate or party committee. The Board of Elections, however, did find that the Randolph County GOP violated a North Carolina rule that soft money from federal parties can only be received by a state party’s executive committee, not county committees.

The Board also ruled that, from now on, only money from sources that are acceptable in N.C. may be used in payments from national parties to state parties. If the state’s corporate ban ends, we can expect even more business money being solicited and given to national soft money accounts for transfer back to North Carolina, particularly from companies that seek favors from both state and national politicians.

Referendum Support. North Carolina law allows businesses to give unlimited amounts to referendum committees which try to influence the outcome of ballot questions on such topics as local school bonds, state highway funding, and the gubernatorial veto.

In the last three years, June 1995 to May 1998, referendum committees have raised more than $3 million – and $2.9 million of that amount (96 percent) came from businesses or business groups that are barred from giving to other state political committees or candidates.

State and federal laws do not allow businesses to treat lobbying or political expenditures as a normal operating expense that can be deducted from their taxable income. However, this policy is not well understood nor uniformly followed, especially regarding business contributions to ballot measures. The treasurers of three referendum committees contacted by Democracy South had three different views on the issue: One said the contributions were not deductible (although he said some companies wanted to make contributions in response to invoices); another said they were deductible; and a third said deductibility was the donor’s choice. Based on conversations with these treasurers and accountants, it is reasonable to conclude that a significant share of business donations to referendum committees is treated as a tax write-off, which the public subsidizes.

Like the level of soft money donations, the $2.9 million contributed to referendum committees offers an indication of the capacity of corporations to mobilize dollars for a political cause they support. Many companies that give sizeable donations to ballot measures have a direct stake in the outcome. The committee urging voters to support the statewide highway-school bond on the ballot in November 1996 received $100,000 from Martin Marietta Materials, $35,000 from Vulcan Materials, and $30,000 from Benchmark Carolina Aggregates, three large suppliers of rock and other road building materials.

The committee that successfully fought a 1998 ballot measure in the Triad to finance a baseball stadium with the help of a new tax on restaurants only raised $34,325 – most of it from restaurants and related businesses. The pro-baseball “Vote Yes” committee raised $897,081 and 99 percent of it came from business groups and corporations that would not be eligible to give directly to a politician.

Independent Expenditures and Issue Advocacy. With encouragement from the U.S. Supreme Court, traditional special-interest groups are increasingly using non-traditional methods to influence voters and public opinion.

Independent expenditures are funds spent on “express advocacy” (for or against an identified candidate) without coordination with any candidate’s campaign.

Issue advocacy is money spent that is not express advocacy and is not coordinated with an electoral campaign; it can convey information about a specific candidate’s record, but can’t cross the Supreme Court’s “bright line” by specifically urging people to support or defeat a candidate. By constructing ads that qualify as issue advocacy, businesses can flood the airwaves with information about a candidate without being subjected to normal campaign finance rules; they can spend unlimited amounts directly from their corporate treasuries and, in most cases, not even disclose how much they spend.

There’s an added incentive for businesses to use this relatively new tool. If advocacy ads are neither lobbying nor electioneering, their entire cost can be treated as a normal business expense and thereby used to reduce the company’s tax liability. Non-profits such as the Christian Coalition and AFL- CIO have successfully used advocacy ads to shape the climate surrounding a political campaign. Given the tax advantages, we can expect for-profit businesses and their trade groups to use the tool with increasing frequency. It effectively is backdoor public financing for business advocacy.

One of the pioneer users of this tool in North Carolina is Farmers for Fairness, the non-profit membership corporation composed of a handful of the top factory-farm hog producers in the state and their allies. In the past two years, FFF has spent at least $2.5 million on preparing, producing and delivering its advocacy ads.

For its fiscal year ending May 31, 1997, FFF treated at least three- fourths of its media costs as tax deductible expenses to its members, according to its accountant. That means the hog producers who pay tax-deductible dues to FFF get $1 million worth of ads for an effective cost of $575,000 – because, the accountant says, when they reduce their taxable income by $1 million, they save $425,000 on federal and state income taxes.

Unfortunately for FFF, its corporate members may no longer enjoy these tax benefits, because the Board of Elections ruled in April that the group’s ads naming candidates are part of a coordinated campaign to influence elections. They are not pure “issue ads,” the Board found, because FFF conducted polls to determine what information would influence a voter’s decision to elect a specific candidate (e.g., Rep. Cindy Watson), and then used that information in the ads. Such a practice makes the ads part of an independent expenditure campaign, which must be supervised by a registered political committee and paid for with non-corporate, non-deductible money.

Judicial Views of Corporate Money. On April 30th, federal District Court Judge Terrence Boyle declared unconstitutional (a) the state’s statutory definition of what constitutes a political committee, (b) the 1931 ban against corporate spending on elections, and (c) the ban against lobbyists contributing to candidates while the General Assembly is in session.

The Fourth Circuit Court of Appeals has granted a stay on that order while it hears the state’s appeal. Meanwhile, the state Republican party has called for lifting all limits on corporate contributions. In his May 18, 1998 statement, party executive director Lee Currie says, “Time and time again, the United States Supreme Court has ruled that campaign contributions are political speech. Any limit then, on political contributions, is a limit on free speech.”

Currie’s statement is simply wrong. Neither the U.S. Supreme Court nor Judge Boyle gives a green light to lifting restrictions on the ways for-profit businesses and their trade groups can participate in the political arena. In fact, their rulings support just the opposite conclusion.

In his April 30 decision, Judge Boyle says that donations by for-profit corporations can be corrosive to the integrity of the political process. He only opposes the state’s law, he says, because it lumps together for-profits and non-profits (like N.C. Right to Life, Inc.) and bans all from independent expenditure activity. Here’s what the judge wrote, quoting from
various US Supreme Court cases:

Of course, corporate involvement in politics poses a risk of corruption, or the appearance of corruption, to the political process through “the corrosive and distorting effects of immense aggregations of wealth that are accumulated with the help of the corporate form and that have little or no correlation to the public’s support for the corporation’s political ideas. . . .” US Supreme Court, 1990 case, Austin v. Michigan State Chamber of Commerce.

The Supreme Court has noted the . . . . “concern over the corrosive influence of concentrated corporate wealth reflects the conviction that it is important to protect the integrity of the marketplace of ideas.” Corporate political activity may thus be regulated to serve the compelling state interest of protecting the integrity of the political process. . . .

He then went on to say that the not-for-profit corporation poses less risk and statutes should be drawn to allow its political activity if it satisfies certain characteristics. He ruled against N.C. because, “The statutes make no attempt to distinguish between corporations which pose a threat to the integrity of the political process and those which do not. They merely prohibit all corporations, without regard for their purpose or threat of corruption, from making independent expenditures ‘for any political purpose whatsoever.'” That’s what makes them unconstitutional, not that they prohibit business donations.

Even the Right-to-Life plaintiffs in the N.C. case approvingly quote the U.S. Supreme Court’s judgment that it’s appropriate to regulate political activity of business entities because “resources amassed in the economic marketplace may be used to provide an unfair advantage in the political marketplace.”

Senate Democrats in HB 579 and House Democrats in HB1700 have crafted new definitions for a political committee and independent expenditures and also new exceptions to the 1931 ban to allow express advocacy by non-profit corporations. Thus far, neither bill has made much progress with Republican legislators, who seem determined to turn Boyle’s ruling into an opportunity to sanction greater opportunities for corporations to influence North Carolina elections.

With the demand for political money increasing, the need to find new sources of cash is obviously growing. Rather than open the floodgates for corporate money to flow in even more way, policymakers should create a source of Clean Money for candidates who voluntarily help ratchet down the fundraising arms race.