Republicans’ secret formula — 501(c)(4)

As even the most inattentive television viewer knows, a tsunami of political campaign money is flooding onto the airwaves this election year — more than $3 billion by some estimates. That’s so much money that Wall Street is raising its profit forecasts for broadcasting companies as a result.

Like almost every pursuit in this free-enterprise country, political campaigning is a business. And, as in many businesses, success often goes not to the entrepreneur who brings a product to market first but to the one who exploits it best.

This year’s innovation is the no-holds-barred use of a section of the federal tax law that covers nonprofit “social welfare” organizations: 501(c)(4). Traditionally, 501(c)(4) organizations are groups such as the NAACP or AARP, not political campaigns. But some canny political entrepreneurs, initially Democrats but now mostly Republicans, realized that 501(c)(4) committees could buy television commercials — to denounce Sen. Harry Reid (D-Nev.), for example — and never disclose who their donors were.

That’s a scandal. Voters deserve to know who’s paying for campaign commercials, on both sides, even if an ad isn’t directly coordinated by the candidate who benefits from it. That’s especially important now that the Supreme Court has ruled that corporations can contribute unlimited money to political causes; that has emboldened firms to spend more, but corporations also like to avoid the adverse publicity that political involvement can bring.

One of the new 501(c)(4) groups, advised by former George W. Bush strategist Karl Rove, says it’s going to spend $65 million this year — much of it to try to defeat Reid. Is some of that money coming from corporations that want to conceal their role in choosing a new Senate majority leader? Probably. Rove’s group, Crossroads GPS, won’t say.

Democrats tried to pass a bill this year imposing disclosure requirements on 501(c)(4) groups, but they failed. Under the tax law, a 501(c)(4) has to show that its “primary purpose” is promoting social welfare, not political campaigning, and most commercials have to communicate a message that does more than advocate for or against a candidate.

But those restrictions haven’t been much of an impediment to getting political messages out. So far, Crossroads GPS has done little social work, but it promises to remedy that once the election is over — by launching a public education campaign in favor of continuing the Bush tax cuts.

“We’re aware of what the law dictates, and we’re extremely careful to follow it,” Jonathan Collegio, a Crossroads spokesman, told me.

Some legal scholars argue that the IRS should crack down on the 501(c)(4) groups — but that can only happen after they file tax returns, long after the election is over. Even then, it’s unlikely.

“The IRS ought to act, but this is not their fight,” Donald B. Tobin, a professor of tax law at Ohio State, told me. “Their mission is to collect revenue, not to regulate political campaigns.”

As usual in Washington, to quote our former colleague Michael Kinsley, the scandal isn’t what’s illegal; it’s what’s legal.

Democrats have denounced the 501(c)(4) gambit, and they’re right to do so. But Democrats have been no slouches in finding innovative ways to funnel millions into political campaigning. In 1996, then-President Clinton held dozens of events in the White House to encourage donors to give “soft money” to Democratic causes. In 2004, Democrats were way ahead in setting up “independent expenditure” committees (known by another section of the tax law, 527) to enable millionaires to donate unlimited money for TV commercials.

And Democrats can’t all claim to have been simon-pure on the issue of disclosure either. The firm of Obama’s chief strategist, David Axelrod, ran an advertising campaign in Illinois in 2006 that didn’t disclose that its main donor was Commonwealth Edison, a public utility; state law didn’t require it. Obama’s White House spokesman, Robert Gibbs, worked for a group in 2003 that ran commercials attacking then-presidential candidate Howard Dean, but didn’t disclose its donors until after the Iowa caucuses; the law didn’t require it.

This time, though, the Democrats are far behind in the game of donor obfuscation. The real question isn’t why are those wily Republicans exploiting a gap in the law to avoid disclosing their donors. That’s just normal entrepreneurial behavior. The real question is how did the Democrats allow themselves to be so badly outfoxed in the big-money game?

There are several reasons. One, of course, was their stated opposition to undisclosed contributions, which would have made it seem hypocritical for them to organize 501(c)(4) committees to compete with Rove (even though, of course, they have every right to compete under the rules currently in effect).

Instead, some leading Democrats blame President Obama — for deciding that big-money raising wasn’t something his party needed or wanted to do.

“Obama has not been encouraging about big money,” complained Harold M. Ickes, a fundraiser for Clinton who pioneered a major independent expenditure operation in 2004. “That has put a damper on it.”

When Clinton was president, he devoted enormous time and energy to wooing donors — spending hours at fundraisers, holding coffees in the White House, golfing with favored fat cats — to a degree that exposed him to well-deserved criticism.

Obama, by contrast, has held independent groups at arms’ length. He has appeared at dozens of traditional fundraising events for candidates and Democratic campaign committees, to be sure, but organizers complain that he has not added the kind of personal attention that might spur donors to write million-dollar checks to independent groups.

That relative neglect has only deepened the demoralization of liberal donors who were disappointed by the Democratic Congress’ failure to pass climate change legislation and by the compromises it made to pass Obama’s healthcare bill.

“A lot of us share Obama’s concern about big money,” Ickes said. “But when you’re in a fight for your life, you should use whatever you can, as long as it’s legal.”

Part of Obama’s calculation appeared to be that the mass-participation political organization he built for his presidential campaign could succeed as well in a midterm congressional election year. That hasn’t happened.

“They really did believe that the energy of 2008 would carry forward,” Ickes said. “Many of us had very grave doubts.”

To be sure, labor unions and other independent Democratic groups are raising millions of dollars too. But they are almost all disclosing their donors; they started more slowly; and they appear unlikely to catch up.

Every election cycle produces surprises, including innovations in fundraising. This year’s election has produced two: the Republicans’ success with expanded 501(c)(4) groups and Obama’s decision not to play the game.

Pious Victorians had a saying: Virtue is its own reward. Obama’s Democrats may find themselves on Nov. 3 wishing they had been a little less virtuous.

doyle.mcmanus@latimes.com