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Report

Small Donor Tax Credits: A New Model

Key Fact: The share of donations coming from small donors is shrinking, while the amount coming from a handful of megadonors is increasing exponentially.

Published: June 13, 2017

Amer­ic­ans agree that the campaign finance system is broken. The vast major­ity of Amer­ic­ans, whether liberal or conser­vat­ive, Demo­crat or Repub­lican, believe that the campaign finance system needs “funda­mental changes,” or that it should be “completely rebuilt.” A primary concern for many is that the system is out of balance, with big money having far too much influ­ence over policy, drown­ing out the voices of ordin­ary voters.

At the same time, Amer­ic­ans have expressed concerns that the domin­ance of a tiny minor­ity of donors limits voter choice by making it less likely that candid­ates without access to those donors can “gain voter atten­tion” and run compet­it­ively.


Intro­duc­tion

Amer­ic­ans agree that the campaign finance system is broken. The vast major­ity of Amer­ic­ans, whether liberal or conser­vat­ive, Demo­crat or Repub­lican, believe that the campaign finance system needs “funda­mental changes,” or that it should be “completely rebuilt."

A primary concern for many is that the system is out of balance, with big money having far too much influ­ence over policy, drown­ing out the voices of ordin­ary voters. At the same time, Amer­ic­ans have expressed concerns that the domin­ance of a tiny minor­ity of donors limits voter choice by making it less likely that candid­ates without access to those donors can “gain voter atten­tion” and run compet­it­ively.

These concerns reflect actual changes in campaign fundrais­ing in recent years. The share of dona­tions coming from small donors is shrink­ing, while the amount coming from a relat­ive hand­ful of megadonors is increas­ing expo­nen­tially. In 1994, small donors gave three times as much to federal candid­ates, parties and polit­ical commit­tees as donors contrib­ut­ing more than $10,000, but by 2014, those large donors gave more than all small donors combined. In 2016, the top 100 indi­vidual super PAC donors spent nearly $800 million, or 11 percent of all federal elec­tion spend­ing. That’s more than double the level they gave in 2012, and a modern day record.

An equally dramatic trend exists at the state level as well. In 2016, states includ­ing North Caro­lina, Cali­for­nia, and Wiscon­sin saw record amounts of spend­ing on state races by so called “inde­pend­ent” groups. The biggest outside spend­ers in those states were primar­ily funded by five- six- and seven-figure contri­bu­tions and received essen­tially none of their fund­ing from small donors. Mean­while, direct contri­bu­tions by small donors to candid­ates have not kept pace with the growth in outside spend­ing — over the previ­ous several elec­tion cycles the share of direct contri­bu­tions to candid­ates from small donors in those states remained almost constant.

Several comment­at­ors have convin­cingly argued that the reli­ance on such a small group of donors has had a real impact on how members of Congress do their jobs, with one noting that candid­ates must spend “count­less hours rais­ing money by court­ing a limited number of indi­vidu­als, instead of meet­ing voters, enga­ging oppon­ents, debat­ing or voting on legis­la­tion."

The Bren­nan Center has long argued that any effort at compre­hens­ive campaign finance reform should have three primary goals: (1) increas­ing and diver­si­fy­ing parti­cip­a­tion in the elect­oral process, by having a greater pool of Amer­ic­ans provide campaign contri­bu­tions; (2) encour­aging candid­ates and parties to focus more on connect­ing with prospect­ive voters, by having them spend more time, includ­ing when fundrais­ing, with those voters; and (3) redu­cing barri­ers to entry that discour­age every­day Amer­ic­ans without access to big donors from running for office.

Our preferred solu­tion for these goals has been a small donor match­ing system. Under this system, public match­ing funds amplify small dona­tions, so long as the candid­ate agrees to strict fundrais­ing limits. There is substan­tial evid­ence from New York City and else­where that a small donor match­ing system can make signi­fic­ant progress in achiev­ing those goals.

But, in recent years, some advoc­ates have promoted addi­tional and altern­at­ive reforms to reach these goals. A tax credit for polit­ical contri­bu­tions has been popu­lar, partic­u­larly with groups skep­tical of other campaign finance reforms. Take Back Our Repub­lic, a conser­vat­ive group focused on campaign finance reform, has proposed a $100 tax credit for polit­ical contri­bu­tions, and in 2013, Repres­ent­at­ive Tom Petri (R-WI) proposed a $200 tax credit or $600 tax deduc­tion. More tradi­tional advoc­ates for campaign finance reform such as Repres­ent Us, an advocacy group, and Repres­ent­at­ive John Sarbanes (D-MD) have put forth tax credit propos­als as well.

In fact, the idea of a tax credit to encour­age polit­ical parti­cip­a­tion is noth­ing new. Between 1972 and 1986, millions of Amer­ic­ans claimed a federal tax credit to subsid­ize hundreds of millions of dollars of contri­bu­tions. And over the last few decades, several states have allowed their resid­ents to do the same.

Similar ideas to return tax dollars to indi­vidu­als that support local polit­ical candid­ates have also had success at the ballot box. In the last two years, voters in Seattle approved a program which allows resid­ents to make small polit­ical dona­tions using tax dollars, and voters in Tall­a­hassee passed a program that refunds small dona­tions.

It is time to revive a system of tax incent­ives for small polit­ical dona­tions. But it is not enough to merely adopt a system that exis­ted more than three decades ago. Congress and the states designed their programs before the inter­net revo­lu­tion­ized giving by small donors. The Bren­nan Center proposes a tax credit struc­ture that would use modern tech­no­logy, includ­ing the inter­net, to make it easier and faster for both voters and candid­ates to bene­fit from the credit.  The old federal tax credit could take many months to claim, some­thing that many believe limited its appeal, making it less likely to bring in new donors.  With 21st century tech­no­logy, we can make claim­ing (or, in the case of candid­ates asking for) the credit almost as easy as send­ing a text.

We also offer ideas to address new real­it­ies; increas­ingly, thanks to Supreme Court decisions like Citizens United, polit­ical spend­ing is coming from outside groups and donors who are not subject to the same disclos­ure regime as candid­ates and parties. We suggest struc­tur­ing the tax credit in a way that will encour­age voters to give to the candid­ates and parties that directly repres­ent them, and encour­age candid­ates and parties to raise money from the constitu­ents they are elec­ted to repres­ent.

If construc­ted in the right way, tax cred­its can help funda­ment­ally change the way campaigns in the United States raise money, and get us closer to our three stated goals of reform. A success­ful program will turn aver­age constitu­ents from merely voters to be cour­ted at the late stages of an elec­tion into poten­tial finan­cial back­ers who can form the found­a­tion of a candid­acy. It will bring tradi­tion­ally less-active people into the polit­ical process, and it will lower the barri­ers to running for office for aver­age Amer­ic­ans who lack access to big donors.

A tax credit system for the 21st century, whether at the local, state, or federal level, would contain the follow­ing elements:        

1. Tax cred­its would be easy and inex­pens­ive to claim: Indi­vidu­als should be able to claim the credit either online or by giving their tax inform­a­tion directly to the candid­ate or polit­ical party they wish to support.

2. To strengthen parties and to ensure that candid­ates’ fund­ing comes from their constitu­ents, taxpay­ers should be eligible to receive two distinct cred­its. One would be for contri­bu­tions to candid­ates from their state. The second would be for contri­bu­tions to polit­ical parties. At the federal level, the Bren­nan Center suggests a $50 credit for each contri­bu­tion per elec­tion cycle.

3. Tax cred­its should have enough value that candid­ates will actively soli­cit them: In addi­tion to being easy to use, taxpay­ers should be allowed to “bank” their cred­its for use in the next elec­tion cycle. This will increase their value over time and should increase the like­li­hood that candid­ates will actively pursue contri­bu­tions from new donors.

4. Juris­dic­tions should pair tax cred­its with other reforms that further increase the voice of small donors: This could mean a system for match­ing small contri­bu­tions beyond those eligible for the tax credit, or subject­ing candid­ates who agree to receive tax credit contri­bu­tions to reas­on­able limits on large dona­tions or spend­ing.
 

Small Donor Tax Cred­its: A New Model by The Bren­nan Center for Justice