Lawmakers Adopt Dark Money Protections Under the Guise of “Privacy”

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By Tony Dechario, a CLC 2020 summer intern, and Austin Graham, legal counsel for CLC's state & local reform program

In poll after poll, Americans across partisan and demographic lines consistently support transparency in the democratic process, in recognition of the critical role that disclosure plays in shining light on the political influence of wealthy special interests and in holding elected officials accountable to the public at large.

While most Americans look favorably on disclosure, lawmakers in some states are quietly mounting a new offensive against political transparency, ostensibly in the interest of “privacy.”

In May, Oklahoma became the latest state to enact legislation that prohibits state and local government officials from requiring the public or nonpublic disclosure of information about donors to any nonprofit organization established under Internal Revenue Code section 501(c), a legal classification encompassing 29 distinct types of tax-exempt, nonprofit entities.

Oklahoma’s new legislative mandate to conceal nonprofits’ donors applies not only to charitable, religious, or educational organizations under section 501(c)(3), but also to nonprofit organizations that engage in substantial partisan campaign activity, including section 501(c)(4) social welfare groups, section 501(c)(5) labor organizations, and section 501(c)(6) chambers of commerce.

Unlike 501(c)(3) organizations, these other types of nonprofits are legally permitted to make expenditures to openly support or oppose candidates for public office, and are commonly used by special interests as vehicles for secret spending in elections and circumventing campaign finance laws.

Once its new law takes effect later this year, the Sooner State will forbid any “public agency” in Oklahoma from collecting or publishing information about donors to 501(c) organizations, except in a narrow set of circumstances; Oklahoma’s law also prevents current or prospective state government contractors from having to disclose the fact that they’ve made donations to 501(c) organizations, even when those organizations are affiliated with public officials who oversee government contracts in Oklahoma.

With passage of the Personal Privacy Protection Act, Oklahoma follows in the footsteps of Arizona (2018), Mississippi (2019), Utah (2020), and West Virginia (2020), all of which have recently enacted strikingly similar donor privacy laws to stifle transparency around the funding of 501(c) groups.

All of these new donor privacy laws work toward the same general goal: preventing the public identification of big donors to nonprofit organizations. This goal strikes at the heart of the “important government interests” that the Supreme Court described in the seminal 1976 case, Buckley v. Valeo, in which the Court found that disclosure informs voters about sources of political spending and helps to guard against corruption.

More recently, in Citizens United v. FEC, a 2010 decision best known for striking down legal restrictions on corporate “independent expenditures” in elections, eight of the Court’s nine Justices joined part of the opinion broadly upholding disclosure requirements for pre-election TV and radio ads about federal candidates, maintaining that voters have “an interest in knowing who is speaking about a candidate shortly before an election.”

Following the Supreme Court’s validation of disclosure in Citizens United, opponents of campaign finance regulation have had little success challenging political disclosure laws in court. Having largely failed to limit disclosure through legal challenges, anti-transparency activists are now turning to the legislative process to carve-out protections against donor disclosure for nonprofit organizations that funnel “dark money” into federal and state elections.

Indeed, each of the recently adopted state donor privacy laws is aligned with a policy framework developed by the American Legislative Exchange Council (ALEC), a nonprofit advocacy network opposed to greater transparency in politics.          

In 2016, ALEC published a “Resolution in Support of Nonprofit Donor Privacy,” which included model legislative language to obstruct “attempts to expand the scope and application of donor disclosure requirements of nonprofit tax-exempt organizations.” 

ALEC’s resolution provides that a 501(c) organization “shall not be a political committee and shall not be required to file any reports,” and that the “state and any agency or political subdivision of [the] state shall not require any organization organized under 501(c)” to file any document with “the names or addresses of the 501(c) entity’s donors or contributors.”

In effect, ALEC’s resolution would nullify pro-disclosure court decisions by instituting new legal protections that preserve the anonymity of funders behind nonprofits’ political expenditures. In addition to its model resolution, ALEC has created a “Donor Disclosure Legislative Toolkit” with detailed instructions for blocking disclosure of nonprofit organizations’ donors.

Notably, each of the state donor privacy law enacted in recent years has incorporated key elements of ALEC’s anti-transparency platform. While some of these state laws include nominal exceptions for campaign finance reports, those states’ elections codes generally do not require donor disclosure by 501(c) organizations anyway.

For example, although Utah’s new donor privacy law has an exception for disclosures required under the state’s election code, Utah’s election code exempts nonprofit entities from having to identify their big donors on campaign finance filings so long as they do not have “a major purpose” of operating as a political action committee in the state.

Along with the enactment of donor privacy protections at the state level, federal officials also have recently pared back longstanding disclosure requirements applicable to 501(c) organizations.

On May 26, 2020, the U.S. Treasury Department and IRS finalized a new rule that relieves many 501(c) groups, including politically active 501(c)(4) and 501(c)(6) organizations, from having to provide the names and addresses of their large contributors—those who made donations of $5,000 or more—on their annual tax returns, even though this information was already considered confidential and not available to the general public under the IRS’s previous rule.

This regulatory change eliminates a valuable tool to help enforce our campaign finance laws, including the prohibition against foreign nationals making contributions in connection with any U.S. election.

The list of states with statutory protections for donors to dark money nonprofits may continue to grow this year, as legislators in Louisiana and Tennessee are currently considering their own donor privacy bills.

This concerning trend in the states, coupled with the recent move by the Treasury Department and IRS to eliminate donor disclosure obligations for many 501(c) organizations, undermines the integrity of our democracy, which depends on open access to information about sources of political speech for voters to weigh the merits of different arguments and to make informed choices on Election Day.

Rather than trying to ensure “privacy” for wealthy special interests, state and federal officials should take to heart the Supreme Court’s full-throated endorsement of disclosure’s constitutionality and give the public more information about the sources trying to rig our political system in their favor.