CALIFORNIA ELECTIONS / BALLOT MEASURES : Tax Regulation Poses Obstacle for Opponents of Remap Plans

A Democratic plan to defeat two hotly contested initiatives on the June 5 California ballot could be hampered by an informal IRS opinion on a longstanding federal tax regulation.

The ballot measures--Propositions 118 and 119--would take from the Legislature much of its power to redraw political district lines after the 1990 census is completed.

Both initiatives are supported by Republicans, who contend that Democratic gerrymandering in 1982 cost the GOP several seats in the Legislature and in California’s delegation to Congress. Democratic lawmakers, who control both houses of the Legislature, oppose the two measures and reportedly plan to spend as much as $6 million on advertising to defeat them.

Much of that money would be raised by individual lawmakers and then turned over to committees created to oppose the two initiatives.

But an evolving IRS interpretation of a regulation on tax-exempt income would make that fund-raising technique much more difficult. The opinion, if applied, would mean that any contributions transferred to the effort against the ballot measures from a lawmaker’s campaign would be taxed as income at a rate of up to 34%.

Karin Caves, a spokeswoman for the campaign to defeat Propositions 118 and 119, downplayed the effect the ruling could have on the campaign. “The same people who contribute to officeholders can contribute directly to the campaign,” she said.

But Senate Democratic Leader Barry Keene of Benicia regarded the threat as more serious. Keene has already raised and transferred $50,000 to the campaign opposing the measures, and he confirmed that other Democratic lawmakers are being “encouraged” to do the same.

Keene described the timing of the IRS interpretation as “suspect” because it would appear to benefit the Republicans. Although the rule applies to both parties, Democrats use the transfer technique more and need to raise more money to defeat the ballot measures because the measures are ahead in public-opinion polls.

“The implications this year are as partisan as anyone could imagine,” Keene said when told of the opinion. “This could well deter people from contributing and certainly would decrease the effectiveness of those contributions.”

Republicans, meanwhile, found it difficult to hide their glee at the prospect of a monkey wrench being thrown into the Democrats’ plans.

“The Democratic members of the Legislature and the congressional delegation who are expected to bear the brunt of the $6-million media buy are going to have to rethink it,” said Lee Stitzenberger, a political consultant working with the campaign in favor of Proposition 118. “I think this will have a chilling effect.”

The income of political parties and campaign committees is exempt from federal income tax only if it is spent to influence the election or appointment of candidates for public office, said Steven Pyrek, an IRS spokesman in Washington. Money spent on lobbying is subject to taxation, he said.

Pyrek said the IRS long ago defined lobbying to include attempts to influence the voters in a ballot initiative campaign. The rationale, he said, is that the voters are acting as a legislature when they consider a ballot measure, and efforts to influence their decision are the same as lobbying an elected official for or against a bill.

The law has been applied for many years to charitable organizations, which are allowed to lobby but not to participate in election campaigns, Pyrek said. Only in the past two years have the definitions been interpreted to also apply to elected officials. The rule has never actually been enforced, he said, although California politicians have been making such transfers for years.

“We have construed a referendum to be equivalent to lobbying,” Pyrek said. “This is the way the service would rule if we were asked to do so.” Pyrek said the rule would be enforced if the IRS discovered a violation through an audit or a report from a third party.

Proposition 118 would require that any redistricting plan be approved by a two-thirds vote of both houses of the Legislature, then be approved by the governor and ratified by the voters. Proposition 119 would create an independent commission to choose a redistricting plan.

Current law allows the Legislature to redraw district lines every 10 years with a simple majority vote of both houses and the signature of the governor. With Democrats firmly in control of the Assembly and Senate, they have the upper hand already and would be able to draw any lines they wish should a Democrat win the race to succeed Gov. George Deukmejian.

On a related fund-raising matter, the director of the Congressional Democrats’ effort to defeat the ballot measures confirmed that the group had proposed that organized labor contribute $1 million to the effort in lieu of making any direct contributions to California members of Congress this year.

But Kathy Meek, executive director of IMPAC 2000, said the deal fell apart when some members of the California delegation balked at the idea of foregoing contributions from labor unions to their individual campaigns.