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Toward a Small Donor Democracy Toward a Small Donor Democracy: The Past and Future of Incentives for Small Political Contributions September 2004 Written by Thomas Cmar Edited by Adam Lioz ACKNOWLEDGEMENTS Written by Thom Cmar, U.S. PIRG Education Fund Legal Analyst. Edited by Adam Lioz, Senior Democracy Advocate for the National Association of State PIRGs and the U.S. PIRG Education Fund. © U.S. PIRG Education Fund, 2004 The author and editor would like to thank Derek Cressman, Democracy Program Consultant; Alison Cassady, U.S. PIRG Education Fund Research Director; Dana Mason, U.S. PIRG Education Fund Democracy Advocate; Democracy Program Interns Lydia Gilbert and Brock Towler; Guy Smith, who sent the author his unpublished research; and Rob Boatright, Steve Weissman, Spencer Overton, Andrew Goldsmith, Judith Miller, and John Bonifaz for their generosity in commenting on drafts of the paper and/or talking through some of the issues contained herein. Special thanks to the Educational Foundation of America and the Deer Creek Foundation for making this project possible. The opinions expressed in this study are those of the authors and the U.S. PIRG Education Fund alone and do not necessarily represent the views of our funders. For a copy of this report, visit our website at www.uspirg.org, or send $25 made payable to U.S. PIRG Education Fund to: U.S. PIRG Education Fund Attn: Reports 218 D Street, SE Washington, DC 20003 (202) 546-9707 Toward a Small Donor Democracy: The Past and Future of Incentives for Small Political Contributions 1 TABLE OF CONTENTS Executive Summary.....................................................................................................................................3 Introduction..................................................................................................................................................7 Background: Political Contribution Incentive Programs .......................................................................12 Legislative history of the federal tax credit for political contributions .......................................................12 Political contribution incentives at the state level.....................................................................................20 Contribution Incentive Programs as Part of Long-Term, Comprehensive Campaign Finance Reform .......................................................................................................................31 Vouchers: One possible future ...............................................................................................................31 Encouraging maximum participation from small donors ..........................................................................35 Combining incentive programs with additional reforms ...........................................................................38 Designing an Effective Federal Tax Credit for Small Political Contributions.......................................41 Structuring a tax credit to maximize its effectiveness..............................................................................41 New federal tax credit: Benefits for democracy outweigh costs...............................................................44 Voucher system: A more effective way to administer political contribution incentives.............................49 Conclusion.................................................................................................................................................51 Recommendations.....................................................................................................................................52 Suggestions for Further Study.................................................................................................................54 Canada....................................................................................................................................................54 Cost analysis...........................................................................................................................................54 Further Analysis of Minnesota PCR Data................................................................................................54 PAC Participation in Oregon ...................................................................................................................55 Other Comparative Studies .....................................................................................................................55 Public Education......................................................................................................................................55 Toward a Small Donor Democracy: The Past and Future of Incentives for Small Political Contributions 2 EXECUTIVE SUMMARY Long before voters register their preferences on Election Day, the flow of political money determines which candidates are able to mount viable campaigns for federal office. Providing public incentives for small political contributions could help average Americans play a more meaningful role in influencing who has the resources to run effective campaigns and win public office. Most modern political campaigns are funded predominantly by a small number of large donors rather than a cross section of the American public. Congressional candidates in 2002, for example, collected more than half of the money they raised from individuals in contributions of at least $1000—from just 0.09% of the voting age public. Our current campaign finance system grants these contributors disproportionate influence over who runs for office and who wins elections—and thereby who dictates public policy. Grassroots candidates who take positions that do not appeal to wealthy donors have difficulty competing with well-funded opponents. Finally, many ordinary citizens are alienated from the process as they perceive that their contributions—and even votes—matter less than the large donations that define the political field of play. Reform advocates frequently discuss setting contribution limits at levels that average Americans can afford to give, establishing spending limits to dampen the fundraising “arms race,” and providing direct public financing of candidate campaigns as potential solutions to the problem of big money dominance in politics. Another solution that has received significantly less scholarly and public attention is providing public incentives to encourage small contributions. By leveraging the power of the Internet and harnessing promising recent fundraising trends, it may be possible to encourage a wave of small contributions that will help balance out the undue influence of large donors. This paper provides a thorough canvass of existing knowledge about small contribution incentive programs at the federal level and throughout the five states that feature similar initiatives—Arkansas, Minnesota, Ohio, Oregon, and Virginia. Our conclusion is that—especially in the new age of Internet fundraising—a well-designed program can play a significant role in increasing the role of small contributors in our democracy and serve as a helpful tool for grassroots candidates seeking to run campaigns geared towards average voters, not wealthy donors. We make several recommendations about how to best design a contribution incentive program to accomplish these goals. Our most significant findings are outlined below. TYPES OF PROGRAMS Three main types of contribution incentive programs have been proposed and/or enacted: • Vouchers: Citizens are provided with vouchers in advance that they may allocate to candidates, parties, or political organizations of their choice. The primary advantage of vouchers is that they allow all eligible recipients to participate in financing campaigns without regard to income or tax liability. Toward a Small Donor Democracy: The Past and Future of Incentives for Small Political Contributions 3 • Refunds: A refund program, operated outside the tax system, reimburses citizens for approved contributions. Minnesota currently operates this type of program and provides refunds within four to six weeks of making a political contribution. • Tax credits/deductions: A tax credit or deduction allows citizens to credit their contributions against their total tax liability or deduct the contribution from their taxable income. Arkansas, Oregon, Ohio, and Virginia currently offer credits and/or deductions. EXISTING PROGRAMS Several contribution incentive programs currently exist throughout the United States. Federal Program • A federal tax credit for small political contributions was first proposed in Congress “It is essential to broaden the base of in the 1950s and ultimately passed by a financial support for candidates and parties. bipartisan 82-17 vote in 1971. To accomplish this, improvement of public understanding of campaign finance, coupled • From 1972 to 1974, taxpayers could choose with a system of incentives for solicitation to claim a 50% tax credit for an individual’s and giving, is necessary.” donations to federal, state, and local candidates and party organizations up to a President John F. Kennedy, supporting a tax limit of $12.50 (or $25 for a married couple credit in 1962 filing jointly), or they could choose to take a 100% deduction off their adjusted gross income for their first $50 of federal, state, or local contributions (or $100 for married couples filing jointly). For the tax year 1975, both of these tax incentives were doubled, creating a 50% tax credit of up to $25
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