What Congress should do about IRS tea party bias


Article Highlights

  • Congress should provide clear guidance on what 501(c)(4)s are - and are not - allowed to do in political campaigns.

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  • Subjective rules are dangerous when it comes to government regulation of campaign activity.

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  • Rules should be as clear/objective as possible, so the IRS can't be strict with some groups & permissive toward others.

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The Internal Revenue Service dropped a bombshell last Friday, admitting that some of its employees had singled out Tea Party groups' 501(c)(4) applications for extra scrutiny. In responding to the scandal, the first step, of course, will be to identify and discipline those who engaged in wrongdoing.

The next step, of greater importance in the long run, should be for Congress to provide clear guidance on what 501(c)(4)s are - and are not - allowed to do in political campaigns.

Nonprofit 501(c)(4) organizations are exempt from taxes on their income. They can receive unlimited contributions, but donors don't get a tax write-off for their gifts. In 1913, Congress adopted legislation requiring that (c)(4)s be "operated exclusively for the promotion of social welfare." The IRS regulations that implement this provision, as modified in 1959, say that an organization must be "primarily engaged" in promoting social welfare. The regulations also specify that supporting or opposing candidates doesn't count as a way to promote social welfare. That makes sense, because Congress has provided a separate tax-exempt status, under Section 527, for political parties and organizations. The big difference is that 527s, unlike (c)(4)s, have to disclose their donors.

The IRS's requirement that (c)(4)s be primarily engaged in promoting social welfare, which seems more indulgent than Congress's command that they be operated exclusively for that purpose, gives (c)(4)s the latitude to devote some resources to campaigns. But, they have to be primarily engaged in other activities - activities that count as advancing social welfare.

The problem is that nobody can be sure where the line is drawn. Some (c)(4)s argue that they can spend up to 49 percent of their resources on campaigns and still be "primarily engaged" in non-campaign activities. Some tax law experts take a different view, suggesting that the allowable percentage is 15 percent or less. The disagreement came to a head during the 2012 campaign, when critics claimed that some (c)(4)s, such as the American Action Forum, Priorities USA, Crossroads GPS and Americans for Prosperity, were overstepping their bounds by spending large amounts on campaign ads.

The IRS hasn't done much to clarify things. In a 1968 ruling, the IRS said that deciding whether an organization is "primarily engaged" in the promotion of social welfare has to be evaluated case by case, based on all of the facts and circumstances. Unfortunately, that kind of open-ended test is highly subjective.

Although they may work in some situations, subjective rules are dangerous when it comes to government regulation of campaign activity. It's far too easy for government employees, consciously or subconsciously, to apply stricter standards to groups that oppose the party in power than to those that support it. And even if the government is even-handed, suspicions of bias can still arise - suspicions that are hard to dispel when there's no clear standard.

We now know that some suspicions were well founded. Tea Party groups seeking 501(c)(4) status have long complained about receiving burdensome IRS inquiries not made of other groups. The IRS steadfastly denied any political bias - until Friday, when Lois Lerner, the agency's director for exempt organizations, admitted that IRS employees in Cincinnati had targeted Tea Party and other conservative groups for special scrutiny. Since then, we've learned that some high-ranking IRS officials were informed of the employees' actions. Fortunately, both Democrats and Republicans have denounced the disparate treatment and promised to investigate.

The danger of future abuse will persist, though, if the standards remain vague and susceptible to political manipulation. So, Congress must spell out clear rules about what is and is not permitted for (c)(4)s. While it's at it, Congress should also clear up another decades-old ambiguity, by specifying whether or not large donors to (c)(4)s have to pay a gift tax on their contributions.

There's ample scope for debate about whether the rules on (c)(4) campaign activity should be strict or permissive. But, they should be as clear and objective as possible, so that the IRS can't be strict with some groups and permissive toward others.

The First Amendment's free-speech protection might not guarantee political organizations any particular tax status. But, it does guarantee equal tax treatment for organizations across the political spectrum - the unpopular as well as the popular, those who oppose the party in power as well as those who support it, and those who are seen as troubling and extreme as well as those who are accepted as centrist and mainstream. When it comes to Americans' right to participate in the democratic process, there's no room for vague standards that enable actual or perceived political bias.

Alan Viard is a resident scholar at the American Enterprise Institute.

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About the Author


Alan D.
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
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