Correction: An earlier version of this editorial incorrectly described Ed Gillespie as a co-founder of Crossroads GPS. Mr. Gillespie did not serve as co-founder of Crossroads GPS but did support creation of a related super PAC, American Crossroads, which reports the identity of donors. This version has been corrected.
ANY HOPE of closing the “dark money” hole in campaign finance this election year has been dashed by an appeals decision from the Internal Revenue Service. The IRS has granted approval to Crossroads GPS, the conservative group founded by Republican operative Karl Rove, as a 501(c)(4) tax-exempt “social welfare” organization. Unlike the super PACs that must report donors to the Federal Election Commission, tax-exempt social welfare groups can keep the identity of contributors hidden from the public. The appeals decision, dated Nov. 4 but recently revealed by the Center for Responsive Politics, will have wide ramifications, encouraging other groups, both conservative and liberal, to proceed down the dark-money trail.
The social welfare exemption has existed for more than a century. In the original statute, groups were to be “operated exclusively for the promotion of social welfare.” In 1959, regulators interpreted the law to mean that groups had to be “primarily” engaged in social welfare — some politics was allowed. Recently, IRS Commissioner John Koskinen testified to the Senate Finance Committee that “primarily” means that at least 51 percent of a group’s activity must be devoted to social welfare — or, no more than 49 percent to political activity. This has been the agency’s rule of thumb for some time, but it failed to clarify the definition, granting all varieties of groups 501(c)(4) exemptions even though they were heavily political. The agency’s ham-fisted attempt a few years ago to target tea party groups in this regard triggered a Republican political backlash and weakened its ability to deal with the problem. An effort to write new regulations was made and then withdrawn, and under the leadership of Majority Leader Mitch McConnell (R-Ky.), the Senate recently passed a budget including a rider that explicitly prohibits the IRS from pursuing clearer rules.
The exploitation of the social welfare exemption has been attempted by liberal groups as well. Whether liberal or conservative, it seems to us that public policy has gone off track; a social welfare tax exemption should benefit social welfare, not become a channel for nondisclosed campaign contributions. In the 2012 presidential election cycle, Crossroads’ political outlays alone made up nearly one-quarter of all spending by non-disclosing groups, according to the Center for Responsive Politics. The IRS initially denied Crossroads status as a tax-exempt social welfare group in 2013, saying it didn’t pass the test, but Crossroads vigorously challenged that, claiming the IRS methods and criteria were too vague. The IRS Appeals Office agreed and gave Crossroads tax-exempt status without offering any further explanation of the reasons in its letter.
Secrecy in campaign finance leads to corrupt influence sought by hidden donors. Secrecy robs voters of facts essential for democracy: which vested interests lie behind the candidates. By its action, the IRS has sent an unmistakable signal that the dark-money channel is alive and well. If Mr. Rove has created a legitimate “social welfare” organization, then just about anyone in politics will qualify. The IRS has thrown in the towel.