Religious interference with state ballot proposals

[COMMENTARY] California’s Proposition 8, the so-called “Gay Marriage Amendment,” has ignited a firestorm of controversy concerning various methods of interference with the conducting of a state ballot proposal. At issue are huge sums of money and volunteer workers provided by religious organizations. Especially irritating is that the source of such assistance quite often pours in from out of state. In this manner, what should be a state contest becomes a national contest of more than just symbolic significance.

While the focus in California at the moment is on the gay/lesbian rights issue of eligibility for marriage, religious groups are also actively involved with ballot measures affecting the right to life versus a woman’s right to choose and embryonic stem cell research. For example, in Michigan last year embryonic stem cell research the Michigan Catholic Conference made donations totaling $4,810,000 to MiCAUSE, a political action committee formed specifically to urge a vote against Michigan’s Proposal 2 to remove restrictions from a 1978 law that had turned out to be a huge impediment to embryonic stem cell research. The Michigan Catholic Conference is the official public policy voice of the Catholic Church in Michigan. This amount represented the vast majority of the whole amount of money raised by supporters of a “no” vote.

People may wonder how a religious organization can spend extensive amounts of money in a statewide campaign to the public in order to directly influence a ballot proposal, given constitutional guarantees separating church and state. But religious organizations are guaranteed by the First Amendment the right to express their views by political activity, just as individuals and non-religious groups are allowed to do so. This point is clearly addressed in an advisory opinion issued in 2000 by Michigan’s attorney general saying, “financial contributions made by churches to oppose a ballot proposal do not violate the Establishment Clause” [of the US Constitution] and that such contributions were exercising freedom of speech.”

The relevant question when a religious group engages in political activity is whether a group can continue to retain its status as a tax-exempt nonprofit organization. Under IRS regulations, churches and religious organizations are classified as nonprofit 501(c)(3) organizations whose political activities are limited.

Endorsing or contributing to the support of a specific political candidate or party is prohibited. However, lobbying is allowed to nonprofits, though with certain restrictions. Ballot proposal contributions are considered under IRS rules to be a form of lobbying, and are treated mostly the same as contributions for or against legislation.

A nonprofit organization has the option of two different methods to determine its monetary ceiling on lobbying expenditures; the “expenditures test” or the “substantial part test.” A nonprofit organization is under the substantial part test by default unless it selects the expenditures test. Churches are not eligible to use the “expenditures test,” but other religious organizations may do so. The “expenditures test” allows the nonprofit to spend on a sliding scale starting at 20 percent of the first half-million dollars of their exempt purpose budget on lobbying, with the percentage reducing as the total sum spent increases. The “expenditures test” has a cap of $1 million on expenditures.

For the expenditures test, the IRS makes a distinction between “direct lobbying” and “grassroots lobbying.” A group contacting its own members to ask a legislator to take a specific action on legislation is conducting direct lobbying. A group that reaches beyond its members urging the general public to take a specific action on legislation is conducting grassroots lobbying. Grassroots lobbying is financially restricted to a quarter of the organization’s total allowable lobbying budget. However, for the purpose of this classification, lobbying the public to take action on a ballot proposal is not considered to be grassroots lobbying, because the public is treated as the legislators that will be voting on this issue.

The substantial part test says that lobbying cannot be a substantial part of a nonprofit organization’s activities. Under the substantial part test, an organization that conducts excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax. However, the IRS does not clearly define what “substantial” means.

“Whether an organization’s attempts to influence legislation, i.e., lobbying, constitute a substantial part of its overall activities is determined on the basis of all the pertinent facts and circumstances in each case,” the IRS says.

Pertinent factors may include the amount of expenditures, time spent by staff and volunteers, and the degree of influence effectuated by the organization’s activity. There is a comparison of the lobbying expenditures with the total annual expenditures of the organization, but this is only an indicator, not a precise guide. Case law seems to have set the ratio’s ceiling in the 5 percent to 15 percent range, depending on other factors. There is no cap figure when using the substantial part test (as there is with the expenditures test).

In short, there is not a bright-line boundary, either to guide the nonprofit as to how much political activity is acceptable to the IRS or guide financial watchdogs in determining whether there has been a breach of IRS rules.

In the case of Proposal 2, the Michigan Catholic Conference chose the “substantial part” test. Many will have difficulty in viewing the donation of millions of dollars for a statewide television campaign as being “insubstantial” political activity.But until the IRS issues a ruling specifically devoted to the group, it is in no danger of losing its nonprofit status.

Did the Michigan Catholic Conference endanger its nonprofit status by spending nearly $5 million to fight Proposal 2? Not until a there is a specific IRS ruling. A religious organization has the First Amendment right to take a position on a ballot proposal, but it is unclear at what point it has violated its tax exempt nonprofit status by doing so, especially if it has selected the “substantial part test” route (as was done by the MCC).

The present tax rules for nonprofit lobbying do not seem adequate for the 21st century. The concept of the “substantial part test” goes back to 1934, though law on its details have at times been modified since then. Determinations by the IRS in an arbitrary manner after the fact does a disservice to both non-profit organizations trying to decide where the boundary of their lobbying is located and those of us who wish to safeguard the public against excessive lobbying by a nonprofit.
Lobbying laws for nonprofits probably need a full overhaul. In the meantime, here are a couple of “quick-fix” concrete suggestions that could be administered.

First, we could treat ballot proposals in the same manner as regular legislation in applying the “direct lobbying” and “grassroots lobbying” distinction. Putting on a statewide media campaign to induce a specific vote on a state ballot proposal is surely a very deep political involvement for a nonprofit organization, needing the tighter restrictions that are placed on other grassroots lobbying to the general public.

Second, we should consider a lobbying cap of $1 million for organizations using the “substantial part test,” as is done with the “expenditures test.” It is one thing for a nonprofit organization to take a side in a state ballot proposal and present its opinion to its own members, and quite another to be the main financial backer throughout a whole state for one political viewpoint.

Proponents of gay/lesbian rights need to consider their fight as part of a larger battle to tightening IRS rules for nonprofits involved in ballot initiatives. In the 2004 and 2006 election cycles, no organization was prosecuted by the IRS for excessive political involvement in a state ballot proposal. However, in 2008 we elected a new sheriff in Washington, one that we should encourage in his campaign to strengthen and enforce IRS regulation of nonprofit political lobbying.

[Bob Ciaffone is a political activist and a professional game-player. He has written five books on poker and two books on chess.]