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Corporate Campaign Spending: The Bucks Stop Where?

When it comes political advertising, the nation's highest court rules, the sky's the limit

In a game-changing decision handed down on Jan. 22, the U.S. Supreme Court cleared the way for corporations big and small to pump as much money as they want into election advertising that explicitly promotes or attacks individual political candidates and issues.

The ruling — framed in First Amendment terms holding that corporations have the same rights as individuals when it comes to political speech — effectively voids a provision of the 1947 Taft-Hartley Act that has prohibited corporations and labor unions from directly advocating the election or defeat of candidates for federal office.

The court’s 5-4 decision in Citizens United v. Federal Election Commission also dismantles additional restrictions on corporate-funded ads in the weeks before a federal election that were enacted as part of the Bipartisan Campaign Reform Act of 2002, sponsored by Sen. John McCain, R-Ariz., and Sen. Russ Feingold, D-Wis.

At the federal level, corporations and labor unions have until now generally been limited to sponsoring political action committees, or PACs, that raise voluntary contributions from their employees or members and that are subject to various limitations in raising and spending money. Direct corporate spending on advertising has largely been confined to “issue advocacy,” which, by law, has had to steer clear of explicitly advocating the election or defeat of specific candidates.

But now, corporations of all legal varieties — with or without shareholders, taxpaying or tax-exempt, controlled by U.S. citizens or not — may spend whatever they want to influence elections as long as their efforts are not coordinated with candidates.

The new playing field

With the court’s decision barely a week old, all the interests potentially affected by it are scrambling to figure out what shape the new playing field might take. Already, though, certain conclusions seem inescapable:

Republicans stand to benefit most from the new rules. Corporate PACs (which traditionally lean Republican) outspent labor PACs (which traditionally lean Democratic) $323.7 million to $73.1 million in the 2008 elections, according to the Washington-based Center for Responsive Politics, a nonprofit, nonpartisan research organization. Leaders of both parties expect the gap to widen in the wake of the court’s decision and with the high-stakes midterm elections approaching.

Independent expenditures could easily dwarf candidate expenditures. Corporations in the health and insurance sectors spent more than $1.6 billion lobbying Congress in 2007 and 2008, nearly double the amount ($861 million) that all winning Senate and House candidates spent on their campaigns in the same period.

U.S. corporations controlled by foreign interests are no longer prohibited from seeking to influence federal elections. Fred Wertheimer, the president of Democracy 21, a Washington-based nonprofit that pushes for stronger campaign finance laws, says the decision “will allow foreign countries, foreign corporations and foreign individuals to participate in electing and defeating federal officeholders and other candidates.”

The biggest effects could come at the state and local levels. The Supreme Court’s decision isn’t just about congressional and presidential elections; it also effectively overturns laws in some two dozen states that limit or ban corporate spending in local elections. In those states, for example, a utility company could now run ads attacking lawmakers who have voted against its requests for rate increases. Similarly, insurance companies, which are regulated at the state level, could underwrite political advertising campaigns aimed at reshaping the composition of the legislative committees that oversee their activities.

Next: Fast . . . or not so fast? >>

Even judges will be affected. In 2004 Don Blankenship, the chief executive of Massey Coal Co., spent $3 million on a statewide advertising campaign that helped to defeat West Virginia Supreme Court Justice Warren McGraw, who had presided over a $50 million judgment against the company, and replace him with Brent Benjamin. Benjamin later voted to reverse the 2002 judgment against Massey. After the court’s new ruling, Massey itself could fund such a campaign. (The U.S. Supreme Court on June 8, 2009, hearing an appeal on that reversal, ruled that Benjamin should have recused himself because of Blankenship’s campaign involvement.)

Green light or yellow?

Corporate executives who might be emboldened to lead their companies into political battle may have some potentially sobering considerations to weigh.

Chief among them is the fact that the activities now rendered permissible by the Supreme Court’s decision are not, under current tax law, deductible as “ordinary and necessary” business expenses. Specifically, Section 162(E) of the Internal Revenue Code denies deductions for any amounts spent in connection with “any attempt to influence the general public, or segments thereof, with respect to elections.”

Andrew Oh-Willeke, a lawyer in Denver who specializes in tax and financial matters, estimates that large, publicly held corporations will incur a steep penalty — “a roughly 65 percent tax,” as he puts it — for amounts spent on advertising for political purposes versus advertising for commercial or charitable purposes.

Changes in the tax treatment of political activity aren’t likely, says Trevor Potter, a Washington lawyer and the president and general counsel of the Campaign Legal Center, a nonprofit group that advocates strong campaign finance restrictions. “The court has historically given the IRS and the tax laws much greater latitude,” says Potter, a former chairman of the Federal Election Commission and general counsel to Republican John McCain’s 2008 presidential campaign. “What’s more, [Section] 162(E) doesn’t prevent political speech or lobbying — it just means that government isn’t subsidizing those activities through the tax code.”

Potter also says that because individuals aren’t entitled to tax deductions or credits for political contributions, the tax law as now written treats individuals and corporations in exactly the same way — the standard the Supreme Court adopted in terms of free-speech guarantees.

And David Primo, a political science professor at the University of Rochester in New York, says that many corporate executives may not be all that eager to have their companies plunge into political advertising for other reasons. “CEOs will be very cautious about how they use a company’s money for independent expenditures because the harms associated with an ill-advised ad attached to a specific firm could outweigh any benefits from other advertising,” he says. “Also, firms have to be wary of shareholder rights groups that might step in and push for shareholder consent for political spending.”

Congressional intervention?

Indeed, some Capitol Hill lawmakers, led by Sen. Charles E. Schumer, D-N.Y., are vowing to push for legislation that, among other restrictions, would require shareholder approval of political expenditures. The idea has the support of Lucian Bebchuk, a professor at Harvard Law School who directs its program on corporate governance. “It would be desirable for Congress to act to require that publicly traded companies do not spend on political purposes without shareholder approval,” he says.

Another proposal making the rounds would require chief executives to appear in political ads (as Washington Post columnist E.J. Dionne Jr. recently mused: “I’m Joe Smith, the chief executive of Acme Consolidated Megacorporation, and I approve this message.”).

Next: A "riotous, wicked, murderous day of atonement”? >>

“It’s unlikely that many companies will buy their own political advertising directly,” says Bruce Freed, president of the Washington-based Center for Political Accountability, a nonprofit organization that advocates transparency in corporate political spending. Companies have already been “laundering an indeterminate amount of money through trade associations and tax-exempt organizations,” Freed says. “There’s no disclosure or accountability.” Under the court’s new ruling, corporate payments for advertising through third parties will increase, he says.

Freed’s organization encourages corporations to disclose the details of their political spending, along with the policies and procedures governing the spending and whatever board oversight might exist. About 70 companies, from Adobe Systems to Xerox, have done so to date.

Historical footnote

President Obama has vowed to fight the court’s ruling, branding it “a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.” In his weekly radio address to the nation two days after the court’s decision, President Obama invoked a legendary reformer.

“A hundred years ago,” he said, “one of the great Republican presidents, Teddy Roosevelt, fought to limit special-interest spending and influence over American political campaigns and warned of the impact of unbridled corporate spending.” Roosevelt championed the 1907 Tillman Act, under which corporations were — and remain, even after the court’s latest decision — barred from making direct political contributions to federal candidates.

Of the $2.2 million Roosevelt raised for his 1904 presidential campaign, nearly three-fourths had come from corporate treasuries, much of it in chunks of $50,000, $100,000 and $150,000. While publicly denouncing what he called a “wicked falsehood” — namely, that his campaign had extorted contributions from the titans of corporate America — Roosevelt privately agonized over the situation in which he found himself.

“Sooner or later, unless there is a readjustment,” he told a reporter, “there will come a riotous, wicked, murderous day of atonement.” After the election, to the consternation of his corporate underwriters, Roosevelt reverted to attacking big business and pushed for reform.

Steel baron Henry Clay Frick, a $50,000 donor, would grow visibly angry whenever he talked about how Roosevelt had spurned the people who’d largely financed his campaign. “We bought the son of a bitch,” Frick said, “and then he did not stay bought.”

Bill Hogan lives in Falls Church, Va.

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