Tax Credit Proposed for Political Contributions

Posted April 11, 2003 at 5:16pm

Sens. Byron Dorgan (D-N.D.) and John Warner (R-Va.) are trying to breathe new life into the political process by reviving an old tax credit that was killed off more than a decade ago.

From 1972 to 1986, the Internal Revenue Service gave Americans tax credits for political contributions, but the tax credit was scratched in 1986 tax-code reforms.

Dorgan and Warner last week introduced legislation to amend the Internal Revenue Code to once again give Americans a nonrefundable tax credit for contributions to Congressional candidates of up to $200, or $400 per couple.

“Our bill would make middle-income Americans more able to donate to candidates,” Dorgan said in a floor speech introducing the bill.

“As campaigns become more and more expensive, the number of small contributors is actually decreasing,” Dorgan explained. “The current campaign finance system is becoming dominated by big-dollar contributors, a trend that is troubling to me.”

The trend also troubles Warner, who has championed similar legislation in the past, but he said he is determined to ensure that such a tax credit not be exploited only by the wealthy.

“Until 1986, there was a $50 tax credit for contributions to political campaigns,” Warner noted in a 2001 floor speech. “According to IRS data, when Congress repealed the political contributions tax credit, ‘a significant percentage of persons claiming the credit have sufficiently high incomes to make contributions in after-tax dollars, without the benefit of the tax credit.’”

Warner and Dorgan’s bill would cap the eligible income levels to ensure the wealthy do not exclusively take advantage of the credit.

Individuals making $60,000 or less would get a $200 tax credit to offset contributions to Congressional candidates. Married couples filing jointly with a household income of $120,000 or less would get a $400 credit.

The old system — which was eliminated during Reagan-era tax simplifications — gave taxpayers two options: a 50 percent tax credit or a 100 percent deduction on the contributions, though the latter was repealed in 1980.

Research by the American Enterprise Institute showed that the wealthiest taxpayers sometimes claimed as much as a third of credit dollars in states with similar tax-credit programs not limited on the basis of income.

In a 2002 AEI report on the topic — “Broadening the Base: The Case for New Federal Tax Credit for Political Contributions” — author David Rosenberg makes a case for tax credits as an incentive to invigorate small donors and help balance the influence of big-money donors in the political process.

The study also points out that six states — Warner’s home state of Virginia, as well as Oregon, Minnesota, Arkansas, Ohio and Arizona — currently offer some sort of tax credit for political contributions, though they approach the tax credit in different manners.

Minnesota’s political refund system operates separately from the tax system, while Arizona’s tax credit applies only to donations made to the state’s Clean Elections Fund, the Rosenberg study noted.

Data from the past suggests the price tag for the credit would be in the hundreds of millions. AEI’s report cites Congressional Research Service data indicating that from 4 percent to 6 percent of taxpayers filed for the credit annually in the 1980s, costing between $170 million and $270 million.

But compared with other federal tax credits on the books, AEI maintains a credit for political contributions would have a relatively minor impact on the federal budget.

In 1999, the eight major federal tax credits available to individuals cost the government on average $3.3 billion, according to the study, whereas the new credit would cost “less than $1 billion, even in the optimal, and most generous scenario.”

The study also warned, however, that such credits are not a panacea.

“First, while it is clear that a tax credit for political contributions is a good idea, it is also clear that these programs do not single-handedly overcome gaps in participation by small and large donors,” the study stated. “Rather those gaps are more likely tied to deeper, structural issues in a state’s campaign finance system, such as a lack of contribution limits, that are not directly addressed by a tax credit for political contributions.”

Even if tax credits are not a cure-all, campaign finance experts such as AEI’s Norman Ornstein, a Roll Call contributor, believe they have value and hold promise for improving the campaign finance system, which got a huge jolt from the comprehensive campaign finance law enacted last year.

“Clearly, a way exists to increase small donations at a relatively modest cost and without creating a large bureaucracy to administer the program,” Ornstein explained in an introduction to Rosenberg’s study. “In addition, a tax credit for small donations would have appeal across the political spectrum.”

Ornstein indicated in an interview that the proposal seems to have an almost universal appeal — appreciated by some of the most ardent foes of other campaign finance reform initiatives.

“When I raised this issue with [Sen.] Mitch McConnell [R-Ky.], he said, ‘This is the only good idea you ever had on campaign finance reform,’” Ornstein quipped.

Moreover, as much as tax credits for political contributions are an incentive for taxpayers, they are also an incentive for politicians.

Rosenberg noted that consultants and campaign managers could have a field day with tax credits “and hopefully be able to say [to donors], ‘I don’t want to take money out of your pocketbook … you’re going to get your money back.”

Added Ornstein: “Clearly it is good for the system if politicians find ways to campaign and raise money in a retail fashion.”