Explainer: What Is Dark Money and Why Is it Such a Problem?

Groups unfettered by campaign finance regulations are wielding more and more influence on elections. New Jersey legislators are taking steps to regulate their activities

New Jersey lawmakers have taken the first step toward shining light onto so-called dark money that seems to have greater and greater influence on elections each year. Spending by groups that are not governed by campaign finance laws is an issue that has been looming over federal elections for more than a decade, and become more prominent in state elections, as well.

The Senate Budget and Appropriations Committee last Thursday voted unanimously to advance S-1500, which would for the first time require so-called issue advocacy and independent expenditure groups, which currently are not subject to campaign reporting requirements, to report large contributions when they are operating in New Jersey.

And the first bill Democrats introduced in the U.S. House of Representatives this term (HR 1) includes a requirement that groups disclose dark-money contributions in federal races, among a host of election-related reforms.

THE QUESTION IS: Why is there so much emphasis on dark money and what’s the problem with it?

Campaign finance laws at the federal and state levels regulate contributions to candidates, campaign committees, political parties and political action committees. There are stricter rules for some of these entities than for others, but all must at some point report who funds them and how they spend their money.

DIFFERENT RULES APPLY: But those rules do not apply to other types of organization. These are politically active nonprofits known by a variety of names: grassroots, social welfare, outside-interest or issue-advocacy organizations. They are also called by the name of the federal tax code to which they must conform — most often 501(c)(4). They are allowed to raise unlimited sums of money and for the most part are not required to disclose who funds them.

At the federal level, a host of good-government groups and a number of lawmakers, as well, have been calling for regulation of these dark-money groups. In the 2018 midterm elections, these groups spent more than $151 million, according to the Center for Responsive Politics’ OpenSecrets.org website. HR 1 is an effort by House Democrats to force disclosure of these groups’ operations and enact other pro-democracy reforms.

MURPHY-SWEENEY CONNECTION: In New Jersey, one such group backing Gov. Phil Murphy has decided not to voluntarily disclose its contributors, as it had promised. This prompted Sen. President Steve Sweeney (D-Gloucester) to announce his support for legislation backed by the state’s electoral watchdog to put some regulations on such groups for the first time. Sweeney — who has been at odds with Murphy over a number of issues — and some other Democrats were unhappy that New Direction New Jersey, a 501(c)(4) that supports Murphy and for which Murphy has raised funds, has run ads touting the governor’s accomplishments twice in the last year.

These dark-money funds are politically active nonprofits governed only by Internal Revenue Service filing requirements, provided they follow all IRS rules.

THE MAIN GROUPS: There are three major dark-money groups:

ORGANIZATIONS LIKE THE NRA: 501(c)(4)s are the most common dark-money groups. They are social welfare organizations that include the National Rifle Association, the conservative Americans for Prosperity and the liberal Majority Forward. In the 2012 election, the biggest year for dark-money spending at the federal level, 501(c)(4)s spent $257 million, or 82 percent of the total $312 million in dark money that year.

UNIONS: 501(c)(5)s are unions. Their spending peaked at about $50 million in 2008 and they spent about $7 million last year.

TRADE ASSOCIATIONS: 501(c)(6)s are trade associations, including the U.S. Chamber of Commerce. These groups spent $55 million in 2012 and $19 million last year.

U.S. SUPREME COURT INFLUENCE: Growth in dark-money spending has been fueled by several U.S. Supreme Court decisions. The first was the 2007 Wisconsin Right to Life v. FEC ruling that struck down a prohibition on issue ads funded directly or indirectly by corporations and unions. Then the Citizens United v. FEC case allowed for unlimited independent political spending by corporations and unions.

Because politically active nonprofits can accept unlimited donations from corporations, unions and individuals, don’t have to make this information public and can spend large sums on ads, they became a popular vehicle for wealthy individuals and businesses to try to influence the electorate.

The 501(c)s that are politically active are tax-exempt, although contributions to them are not tax-deductible. That differs from other nonprofits, which are not allowed to engage in political activities if their contributions are tax-deductible by donors.

WHAT THEY CAN’T DO: Dark-money groups cannot specifically advocate for or against a candidate as their primary mission, but up to 49 percent of their actions and spending can be in the political arena. The organizations must file annual tax returns with the IRS showing how they spent money over the prior year, but they do not have to report who contributed to them.

The only time these dark-money groups have to file campaign-related reports with the Federal Election Commission is when they fund ads that specifically advocate for or against a federal candidate and when they run “electioneering” ads around the time of an election and mention a candidate. The groups must provide information about the cost of the ads, but are only required to give the names of contributors who designated their contributions pay specifically for the ads.

A court ruling last fall had appeared to require, at least temporarily, dark-money groups to provide information on more of their contributors but the FEC — which is constantly deadlocked as its six members are evenly split between the two major parties — wrote a much narrower rule. The longstanding case behind that ruling is still under appeal.

All those rules apply only to groups operating in federal elections.

NO LAWS IN NEW JERSEY: New Jersey currently has no laws requiring disclosure by politically active nonprofits, although the state’s electoral watchdog has been asking lawmakers to enact disclosure rules for years.

The New Jersey Election Law Enforcement Commission has been relatively lucky in getting voluntary disclosure of contributors from many issue-advocacy organizations that have been active in state elections. But not all groups have disclosed.

For instance, a 501(c)(4) with ties to then-presidential candidate and recently elected Utah Sen. Mitt Romney spent an estimated $7.8 million in 2011 and 2012 on issue-oriented ads promoting then-Gov. Chris Christie, who would be up for re-election in 2013, notes a white paper from ELEC. Americans for Prosperity, founded by the Koch brothers, spent about $571,000 in New Jersey’s 2011 legislative races and $400,000 in the 2013 elections. The Kochs are billionaires who control Koch Industries and have spent more than $100 million on conservative and Republican political causes.

LOBBYING FOR NJ REGULATIONS: During last week’s hearing on S-1500, ELEC executive director Jeffrey Brindle said regulating issue-advocacy groups is long overdue, as their influence has grown exponentially. In the 2017 state elections for governor and the Legislature, the state and county political parties spent a combined $27 million, while independent groups spent $47.5 million. Dark-money groups have begun spending “significant amounts” in local elections, as well, he added.

“History has shown that you can’t get money out of politics, it always finds its way into the political system,” Brindle said. “The best way to deal with the issue of money in politics is to pass laws that change the direction of the flow of that money … to accountable parties and candidates and away from less accountable independent groups.”

RECORD SPENDING IN 2018: The influence of issue-advocacy groups in federal elections has been even greater. Brindle said that in last year’s midterm congressional races, independent spending in New Jersey hit a record $49 million. By contrast, the state and county Democratic and Republican parties spent just $8.1 million. Groups spending money on federal elections would not be regulated by S-1500. It would take the passage of HR 1 or other federal legislation to regulate them.

The great problem with dark money is that voters do not know who is paying for ads meant to influence their votes. This makes it more difficult to evaluate the ads and know what weight to give the information presented in them when deciding which candidates and public questions to support or reject.

*“There is a real and growing cynicism that exists between the public and its elected representatives on all levels of government,” said Sen. Troy Singleton (D-Burlington), prime sponsor of S-1500 during last week’s hearing. “A key component of that cynicism can be traced to our current campaign finance system.”

SHADOW OF CITIZENS UNITED: Singleton said that the Citizens United and other rulings have “rendered moot decades of reasonable campaign finance laws.” What has resulted is “a system that is dominated by a modest number of wealthy special interests,” many of which have created “a web of clandestine groups that live in the shadows of our political system with benign sounding names designed to conceal donor identities and their true intentions from the public,” Singleton continued. “Greater transparency allows voters to make an informed judgement call.”

S-1500, as amended last week, would require disclosure by issue-advocacy groups of contributions of at least $10,000 and spending of $3,000 or more. When first introduced, the thresholds were much lower, at $300 each. The bill, at Sweeney’s request, would also require disclosure retroactively to January 1, 2018, likely to force New Direction New Jersey to make its donors’ identities public.

TIE-IN TO GEORGE NORCROSS: It would also impact groups that have supported Sweeney in the past, most notably General Growth Fund, a 501(c)4 with ties to Sweeney ally and South Jersey political boss George Norcross.

It was recently revealed in a story in Politico that PSEG had mistakenly donated $55,000 to General Majority PAC, which is tied to Norcross — and by association to Sweeney. As noted, PACs do have to reveal their donors. PSEG had meant the donation to go to General Growth Fund, a different, dark-money fund at the same address. The donation had come on the heels of legislative approval for a $300 million nuclear subsidy bill that had been championed by Sweeney.

SKIRTING THE RULES: It is not uncommon for a 501(c)(4) to ally with a SuperPAC. The SuperPAC can accept unlimited funds and must disclose its contributors, though it can often avoid doing so until after an election is over, thus skirting the rules and keeping voters in the dark about its funders. But they can accept donations from an affiliated dark-money funds — an easy way for donors to give unlimited and unknown money to candidates or issues. The donor is not disclosed by the politically active nonprofit but turns over the money to the PAC under its own name. Thus, voters can remain in the dark for good.

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