Get IRS Out of the Business of Regulating Political Speech

A final thought, I hope, on the IRS/tea party scandal: Why do we want the IRS  regulating political speech?  It seems crazy on its face, yet that is exactly the system we have created.

True, the agency bungled its scrutiny of conservative political groups seeking tax-exemptions. But should it even be deciding which political organizations should get favored tax treatment and which should not? Why is a tax collection agency regulating political speech at all?

That this is happening at all is an accident of history. The section of the law political organizations are using to win tax-exempt status was never intended for this purpose.  Section 501(c)(4) has been around for a hundred years, but its purpose was to grant tax-exempt status to social welfare organizations such as community groups and citizens associations.

In the wake of the Supreme Court’s 2010 Citizens United decision, (c)(4) status became a popular mechanism for bankrolling political campaigns. Citizen’s United made it possible for unions and businesses to spend unlimited amounts of money on politics, but the vehicle they used for funneling cash to campaigns, Sec. 527 organizations, required public disclosure of their gifts.

501(c)(4)s are different. They can collect massive amounts of money anonymously.

But they have one restriction. Their primary purpose must be social welfare, not financing political campaigns.

And this has thrown the IRS into a cesspool. What does primary purpose mean? And what does campaigning mean? Where do you draw the line between social welfare and politicking? The law demands that the IRS make those distinctions. It must, in other words, define political speech—a role for which is seems particularly ill-suited.

IRS agents don’t have much help. The statute is murky. Case law is vague. The agency’s own guidelines require that these applications be decided on a case-by-case “facts and circumstances” basis.

So the IRS is put in an untenable position. On one hand, it has been under pressure to crack down on what some see as abuses (I wrote a Tax Vox blog urging the agency to act back in 2010). Yet, when it tried, it was rightly accused of political partisanship. True, it could have avoided much of the current mess if it was more even-handed in its investigation of these groups. But can the IRS ever define what is a permissible political activity and what is not? Should it even try?

Worse, no politician will ever defend the agency from criticism. Whatever the IRS does, elected officials of both parties will throw it under the bus at the first hint of criticism.  Just watch President Obama.

What’s the answer? Alan Viard at AEI urges Congress to write rules that better delineate political activity by tax-exempts. The New York Times has called on Congress to retain (c)(4) status but only for groups that have no political activity.

I’d get the IRS out of the political speech business entirely.  If Congress wants to regulate campaign finance, it ought to do so explicitly rather than through an ad hoc structure built around an obscure section of the tax law governing citizens associations. Congress could, for instance, simply pass a law requiring public disclosure of all campaign gifts, no matter how they are delivered. That one step would largely dry up requests for (c)(4) status.

Congress could reserve tax-exempt status for those organizations that completely eschew politics. We’d all be free to say what we want and give money to whom we want. But this activity would be entirely disconnected from tax-exempt status.  Fellow Forbes.com blogger Peter J. Reilly made a similar argument yesterday. So has Bloomberg’s Josh Barro.

I know, you’re going to ask what agency would regulate this, the Federal Elections Commission? Well, you’re right, the FEC is a punchline today.  But Congress could fix that. Besides, the FEC’s failures don’t justify dumping this mess into the lap of the IRS. Honestly, I’d rather have the Transportation Dept. regulating political speech than the IRS.

In effect, Congress and the Supreme Court have thrown the IRS into a lose-lose situation. And the agency has lost. Why are we surprised?