Charities in politics: a reappraisal.

• Author: Galle, Brian
• Position: Introduction through III. Lobbying Charities or a Subsidy for Lobbying? Economies and Diseconomies of Scope A. Diseconomies 1. Agency Costs, p. 1561-1596

ABSTRACT

Federal law significantly limits the political activities of charities, but no one really knows why. In the wake of Citizens United, the absence of any strong normative grounding for the limits may leave the rules vulnerable to constitutional challenge. This Article steps into that breach, offering a set of policy reasons to separate politics from charity. I also sketch ways in which my more precise exposition of the rationale for the limits helps guide interpretation of the complex legal rules implementing them.

Any defense of the political limits begins with significant challenges because of a long tradition of scholarly criticism of them. Critics of the limits suggest that the "market failures" that justify tax subsidies for charity also afflict group efforts to monitor politicians and organize politically, and thus the subsidy should extend to cover those activities. These claims, though, overlook a series of additional issues suggested by transaction cost economics and other aspects of economic theory.

Most significantly, even if lobbying and electioneering should be subsidized, it does not follow that these functions should be carried out by charities. I argue that combining politics with charity may produce a set of diseconomies of scope, including higher agency costs, diminished "warm glow" from giving, and greater inframarginality of deduction recipients. In addition, I argue that the economically ideal tools for reaching the socially optimal levels of charity and lobbying are incompatible with one another. Although there are also offsetting gains from the combination, many of these gains further exacerbate the diseconomies.

TABLE OF CONTENTS INTRODUCTION I. BACKGROUND II. PRESERVING THE GOVERNMENT'S MONEY? A. Government Failure and Diversity Rationales 1. "Get Stuff" 2. Interest Representation 3. Political Pluralism B. Privatization Rationale C. Government Complement Rationale D. An Initial Assessment Proves Incomplete III. LOBBYING CHARITIES OR A SUBSIDY FOR LOBBYING?: ECONOMIES AND DISECONOMIES OF SCOPE A. Diseconomies 1. Agency Costs 2. Effects on Warm Glow 3. Regulatory Mismatch 4. Inframarginality of the Deduction 5. Entanglement and Executive Attention B. Economies 1. Cost Advantages of Combined Activities 2. The Downside of Cost Advantages C. Summary IV. LEGAL IMPLICATIONS A. Defining Lobbying B. "Substantial" C. Donations or Organizations? V. ELECTIONEERING A. Defending the Electioneering Ban B. Defending Exceptions to the Electioneering Ban C. Transparency as a Precondition for the Exceptions CONCLUSION INTRODUCTION

As the Supreme Court has deregulated campaign finance over the past few years, money has poured into every crevice of politics, but maybe nowhere more so than in the nonprofit sector. (1) Most of the notorious "Super PACs," including Karl Rove's Crossroads GPS, are organized as nonprofits. (2) Federal tax law in theory prevents most nonprofits from devoting the bulk of their efforts to political campaigns and also limits the lobbying efforts of true charities, such as hospitals, schools, and churches. (3) But now that the Court has declared the pool open, even church leaders are diving in, with a coalition of ministers frankly daring the IRS to attempt to enforce its rules against them. (4)

Should we care? That is the central question for this Article. Legal limits on lobbying by charities have been around for a long time, but truly thorough explanations for why they exist have been slow to develop) For about forty years, that was a problem mostly for academics, and perhaps for Congress.

Now, though, Citizens United v. FEC and the rest of the deregulatory wave of campaign finance decisions lend new urgency to identifying the government's interest in regulating the political activities of charities. (6) Under federal tax law, charities cannot engage in more than a "substantial" amount of lobbying and cannot take part in campaigns for elective office at all. (7) The constitutionality of the two limits had been mostly settled by a series of Court decisions in the early 1980s. (8) Because government was not obliged to fund speech, the Court held, Congress could--with little justification or explanation--make abstention from politics a condition of its subsidies for the charitable sector. (9)

Those cases, however, depend on the assumption that a charity's stakeholders can still express themselves through the use of an affiliated, noncharitable nonprofit entity. (10) The Citizens United Court rejected, albeit in a somewhat different context, a very similar argument: the government had claimed that Citizens United was not burdened by campaign expenditure limits, because it could mitigate those limits by establishing a separate PAC. (11) The Court waived aside that alternative as too burdensome to sidestep First Amendment scrutiny. (12) And strict scrutiny, of course, demands that the government offer a compelling interest in support of its regulation.

Many other authors have also written on the connection between charity and politics, and in any literature as crowded as this one, any new contribution is necessarily incremental. (13) But prior authors have overlooked some fundamental economic concepts. For example, critics of existing political limits suggest that lobbying, at least, is consistent with the goals of the charitable contribution deduction. (14) The standard economic explanation for the deduction, though, is to encourage the production of goods the private market would otherwise fail to deliver. (15) To be sure, lobbying can be a tool for delivering services to the needy. But that implies that lobbying should be limited to lobbying in favor of delivering new public goods, not blocking or repealing them. This is a considerable oversight, given that political economists believe that the vast majority of effective lobbying is aimed at obstructing new legislation or regulation. (16)

Another gap that would surprise an organizational economist is the absence of any analysis of economies of scale and scope. Some opponents of the political limitations suggest plausibly that market failures also afflict efforts for underrepresented communities to unite for mutual political benefit. (17) Perhaps, then, lobbying should also be subsidized. Should the two tasks, lobbying and charity, be conducted together in the same organization, though? Are the two more effective when combined, or are there instead ways in which one might undermine the other? That seems like a key question, and so far it has gone unasked. Answering it will form the core of my analysis.

There are other omissions as well. Political scientists have already debated the best design for political subsidies. (18) The charitable contribution deduction, which is more generous for wealthier interests and allows for unlimited spending, is exactly the type of design that all the otherwise fractious political scientists can agree they would reject. (19) The finance and organizational-theory literatures offer a rich account of the perils of organizations that try to conduct two unrelated tasks at the same time: higher agency costs and managerial distraction are usually the result. (20)

In sum, there are potentially two distinct questions about the legal separation between charity and politics. First, should we subsidize political activity? If not, then we have an easy answer: the limits are simply targeting rules for government dollars, albeit with some potentially tricky questions about how to implement that targeting. Supposing that politics should sometimes get government support--and arguably it should--we then have the question of how to deliver that additional subsidy. This design problem, I will argue, is probably what best justifies the existing rules. (21)

As for the remainder of the Article, Part I offers more detailed background for readers not familiar with the tax rules governing charity or the constitutional law bearing on the validity of those rules. Part II begins the analysis by examining whether the rationales usually offered for government subsidies, such as in the case of the charitable contribution deduction, also justify a subsidy for lobbying, a subset of political activities. Although I find that these rationales offer less support than critics of the limits have acknowledged, the rationales do argue for subsidies at least for some people to engage in some kinds of lobbying. Part III therefore takes up the design question, asking whether charity and politics are wisely conducted together. Part IV plays out the legal implications of Parts II and III, offering suggested definitions of "lobbying" and "substantial," and addressing other questions that currently vex lawyers in the field. Part V briefly applies the lessons of Parts II and III to charitable involvement in campaigns for elective office.

1. BACKGROUND

   To understand political limits on nonprofits, the reader must unfortunately take a brief tour of tax law. Federally recognized nonprofits can earn two distinct forms of tax benefits. Noncharitable nonprofits, such as labor unions and cooperatives, are exempt from the federal tax on corporate income. (22) Organizations meeting the tougher standards of [section] 501(c)(3), which I will somewhat loosely group together as "charities," are entitled to this exemption and also are eligible to receive deductible contributions. (23) That is, individuals who donate to a qualified 501(c)(3) can reduce their taxable income by the amount of the contribution, subject to a series of technical limitations. (24)

   The dollar value of this charitable contribution deduction ("the deduction") is only a fraction of the money donated. Reducing taxable income by one dollar shrinks the size of the check the taxpayer has to write to the government in an amount equal to the taxpayer's marginal rate multiplied by one dollar. (25) So, for example, if Louise makes a $1,000 contribution and has a 28 percent...