Small Donor Tax Credits: A New Model

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.

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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

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