Soft and Hard Money in Contemporary Elections: What Federal Law Does and Does Not Regulate

Soft and Hard Money in Contemporary Elections: What Federal Law Does and Does Not Regulate

Order Code 97-91 GOV
Updated March 15, 2002
CRS Report for Congress
Received through the CRS Web
Soft and Hard Money in
Contemporary Elections: What Federal Law
Does and Does Not Regulate
Joseph E. Cantor
Specialist in American National Government
Government and Finance Division
Summary
Financial activity in federal elections is governed by federal statutes, which have
evolved under the influence of various court rulings. The Federal Election Campaign Act
(FECA) of 1971, as amended, imposes limitations and prohibitions on money from
certain sources and requires public disclosure of money raised and spent in federal
elections. Based on the Supreme Court’s 1976 Buckley v. Valeo ruling, federal law
generally does not impose mandatory limits on campaign spending by candidates or
groups.1 While federal law regulates some types and sources of campaign money, other
types and sources are exempt from coverage. Also, there are wide differences in what
federal law allows in federal elections and what 50 state statutes allow in state elections.
Money that is outside the federal regulatory framework, but raised and spent in a manner
suggesting possible intent to affect federal elections, is known as soft money. The
omissions from federal regulation and disparities between federal and state laws have
created confusion about current practices. This report examines the major types of
financial activity in elections and what are often labeled as loopholes in federal law.
In the 107th Congress, both the House-passed Shays-Meehan (H.R. 2356) and the
Senate-passed McCain-Feingold (S. 27) bills would ban the raising of soft money by
national parties and federal candidates or officials, and would restrict soft money
spending by state parties on what the bills define as federal election activities. Both bills
would also regulate certain communications now considered to be “issue advocacy” and
thus outside the purview of federal election law, designating them instead as
“electioneering communications,” subject to disclosure requirements and, for specified
entities, a prohibition on their financing with treasury funds.
1 Although such limits exist in presidential races (and in some states and localities), these limits are
accepted voluntarily by candidates, usually in exchange for public funds or benefits.
Congressional Research Service ˜ The Library of Congress

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Activity Regulated by Federal Law: Hard Money
Only money raised and spent according to the requirements and restrictions of federal
law (hard money) may be used in connection with an election for federal office. While the
law does not clearly define what is meant by influencing a federal election, a standard of
express advocacy, based on court decisions, has gained wide acceptance in evaluating
expenditures on voter communications. Federal Election Commission (FEC) regulations
offer the following definition, as the standard for a communication’s treatment as “in
connection with a federal election,” hence triggering the provisions of the FECA:
Expressly advocating means any communication that . . . uses phrases such as “vote for
the President,” “reelect your Congressman,” . . . “Smith for Congress,” “Bill McKay
in ‘94,” . . . “defeat” accompanied by a picture of one or more candidate(s), . . . or
communications . . . which in context can have no other meaning than to urge the
election or defeat of one or more clearly identified candidate(s) 2
Key features of FECA regulation include:
! Prohibited Sources—Unions and corporations are prohibited from
making contributions or expenditures in federal elections. The corporate
ban was first enacted in 1907, the labor ban in 1943. While union
treasury and corporate money may not be used in federal elections, a
separate segregated fund—i.e., political action committee (PAC)—may
raise voluntary contributions from designated classes of individuals, to
give or spend in federal elections. [2 U.S.C.§441b]
! Source Limitations—Contributions to candidates, parties, and PACs in
federal elections are limited, e.g., for an individual—$1,000 per candidate,
per election; $5,000 per year to a PAC; and an aggregate of $25,000 per
year to all federal candidates, parties, and PACs. Most PACs and party
committees may give a candidate $5,000 per election. Parties may also
make coordinated expenditures to pay for campaign services or ads for
and with the cooperation of a candidate, subject to formula-based limits,
indexed for inflation. [2 U.S.C.§441a]
! Disclosure—Candidates, PACs, and parties involved in federal elections
must register with the FEC and file periodic reports on receipts and
expenditures, itemizing for amounts over $200. [2 U.S.C.§432-437]
Money Outside the Candidate’s Control: Independent Expenditures.
Federal law recognizes a particular type of campaign expenditure, wherein an individual
or group communicates a message to voters without coordination with any candidate. 2
U.S.C.§431(17) defines independent expenditure as an expenditure:
2 11 C.F.R.§100.22; these 1995 regulations also contain a second part, derived from a 1987 Ninth
Circuit ruling in FEC v. Furgatch, which defines “express advocacy” in broader terms, allowing
for reasonable interpretation of a communication “taken as a whole.” While this section remains
on the books, it was declared unconstitutional by a federal district court in 1996, a ruling since
upheld by a federal appeals court. It remains in limbo, due to conflicting judicial decisions; if
ultimately upheld by further rulings, it would greatly affect campaign finance regulation. For a
discussion of the constitutional issues, see: CRS Report 98-282, Campaign Finance Reform: A
Legal Analysis of Issue and Express Advocacy, by L. Paige Whitaker.

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by a person expressly advocating the election or defeat of a clearly identified candidate
which is made without cooperation or consultation with any candidate, or any
authorized committee or agent of such candidate, and which is not made in concert with,
or at the request or suggestion of, any candidate, or any authorized committee or agent
of such candidate.
Such expenditures have typically been undertaken by a small number of PACs to support
or oppose candidates to a greater extent than permitted as direct contributions. Because
independent expenditures use express advocacy, hard money is required: activity is
disclosed, and funds must be from federally-permissible sources and amounts. (This is
different from issue advocacy, as will be discussed below.)
As an expenditure (not a contribution), total spending is not limited, per the Buckley
v. Valeo ruling (see below). Hence, independent expenditures are sometimes viewed as
loopholes in current law. But again, while spending is not subject to limits, contribution
limits and reporting requirements fully apply. (If an expenditure were made with the
knowledge or cooperation of a candidate, it would be deemed an in-kind contribution to
the candidate, subject to FECA limits.) In Colorado Republican Federal Campaign
Committee v. Federal Election Commission [116 S. Ct. 2309 (1996)], the Supreme Court
ruled that parties, like PACs and other groups, may engage in this form of spending.
Buckley v. Valeo Ruling
Many court cases have affected federal campaign finance law, but the Supreme
Court’s Buckley v. Valeo decision [424 U.S. 1 (1976)] has played a paramount role in
shaping both the law and reform efforts. Essentially, the Court declared that both
contribution and expenditure limits restricted certain First Amendment rights. However,
the Court said that reasonable contribution limits could be justified by a countervailing
governmental interest, in protecting the integrity of the electoral system from real or
apparent corruption, arising from donations to or activity coordinated with candidates.
The Court saw no such justification for spending limits, as it saw no inherent corruption
from large expenditures of money by candidates or outside groups.3 Hence, the Court
struck down prior limits on expenditures, whether by a campaign committee, a candidate
from personal funds, or an independent group appealing directly to voters. Only voluntary
limits, such as in the presidential public funding system, were sanctioned by the Court.
Activity Outside of Federal Regulation: Soft Money
The concept of soft money was developed by labor unions, after the 1943 ban (made
permanent in 1947) on union money in federal elections. Labor responded most notably
with PACs, to raise voluntary donations from members. Unions also found ways to use
their treasury money to influence public policy (aside from union PAC contributions in
federal races), e.g., state and local candidate donations, and “nonpartisan” education, get-
out-the-vote, and registration drives.4 Three major soft money types are discussed below.
3 The Court distinguished (as does the law) between a contribution, where authority to spend money
to influence voters is transferred from donor to candidate (or committee), and an expenditure, where
the source pays directly for a communication with voters.
4 Alexander Heard, The Costs of Democracy (Chapel Hill: Univ. of N.C. Press, 1960), p. 177-178.

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Labor/Corporate Exempt Activity. While banning direct corporate and union
money in federal elections, 2 U.S.C.§ 441b(b)(2) exempts three types of spending from
its “contribution” and “expenditure” definitions, if aimed only at certain “restricted
classes:” for a union, its members, officials, and families; for a corporation, its executive
and administrative personnel, stockholders, and families. The exempt activities are:
! Establishing, administering, and soliciting money for a PAC;
! Nonpartisan get-out-the-vote and registration drives; and
! Internal communications with members on any subject.
The last category—internal communications—may involve express advocacy, which is
permitted only because of the restricted class receiving the communication. Also, as
exempt activities, sources and recipients of funds are generally not disclosed; the one
exception is for internal express advocacy communications exceeding $2,000 per election.
In the absence of solid data, it is generally believed that exempt activities are a more
important tool for unions than for corporations, because union restricted classes may be
more easily and effectively mobilized. Also, while the FECA addresses exempt activities
regarding federal elections, unions and corporations may contribute in state or local
elections to the extent allowed therein (some 41 states allow union money and 30 allow
corporate money in their elections); this discrepancy between federal and state law—and
the generally less restrictive state standards—has an impact on the next category.
Party Soft Money. Party soft money is raised by the national parties from sources
and in amounts prohibited in federal elections and typically transferred to state parties to
the extent allowed under particular state laws. Money raised in this manner is generally
from unions and corporations, or from individuals who have reached their aggregate
federal limit ($25,000 a year). The funds are kept in “non-federal” bank accounts (thus
separate from money in “federal” accounts, which must be raised solely from federally-
permissible sources and amounts). These funds are largely transferred from non-federal
accounts to state parties for grassroots and party-building activities (although some of it
is used by the national party for a portion of administrative costs and issue advocacy).
Party soft money has played a notable role in presidential elections since 1980, as party
and campaign officials and party nominees have increasingly been involved in raising it.
Party soft money was propelled by: (1) the 1979 FECA Amendments, which allowed
a greater role for state and local parties by exempting certain grassroots, registration, and
voter drives, and generic party-building activities from FECA limits; and (2) FEC Advisory
Opinions (e.g., AO 1978-10), which allowed a share of corporate and union money in
financing these efforts. But while the law allowed state and local parties to use soft money
on activities which helped their entire candidate slate, the law still prohibited money that
was not federally-permissible from benefitting federal candidates. This concept of mixed
activities, which benefit federal, state, and local candidates, gave rise to a requirement for
careful bookkeeping so that the share of such activities benefitting federal races uses only
hard money. FEC regulations in 1991 (11 C.F.R.§102, 104, and 106) required political
committees with both federal and non-federal accounts and that engage in mixed activities
to allocate their expenditures according to specified formulae. These regulations required
disclosure of all national, state, and local party finances from federal accounts and of
transfers from non-federal accounts for a share of mixed activities.
Data for the 2000 elections show receipts of $495.1 million by the major national
parties’ non-federal accounts ($245.2 million for Democrats and $249.9 million for

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Republicans), up nearly 100% over the $262.1 million raised in 1996 ($123.9 million by
Democrats and $138.2 million by Republicans).5
Issue Advocacy. Since the 1996 national elections, attention has increasingly
focused on broadcast communications by both major parties and interest groups across the
political spectrum which discuss candidates’ merits in conjunction with particular issue
positions; while technically not meeting FECA criteria for election-related activity, these
ads have been widely viewed as intending to influence federal races. As public policy
messages without explicit election advocacy, such activities are labeled issue advocacy.
By not explicitly urging the defeat or election of clearly identified candidates, groups can
present information to the public which encourages more positive or negative views of
public officials who also are candidates. Not only can these communications be paid for
with funds from any source, in any amount, but, with one notable exception (see below),
they are not uniformly disclosed. (This contrasts with independent expenditures, with
which issue advocacy is often confused; while both are purported to be independent, only
independent expenditures meet FECA criteria as expenditures, as interpreted in court
rulings limiting the extent to which the law can regulate political spending.)
Highly visible “issue spending” in the last three elections has reinforced perceptions
of a major loophole by which politically interested groups circumvent federal election law.
Lack of disclosure leads to reliance on estimates of its extent. The Annenberg Public
Policy Center estimated that some $135 million was spent on broadcast issue advocacy in
1996, between $275 and $340 million in 1998, and $509 million in 2000.6
A Brennan Center for Justice study of political broadcast ads in the top 75 media
markets found that, in 1998, two-thirds of ads examined were sponsored by parties, not
interest groups, and only 4% of candidate ads used express advocacy language, suggesting
that “magic words” may not constitute a meaningful boundary between campaign-related
and protected issue advocacy speech.7 Its 2000 study found that the national parties spent
more on TV to boost their presidential nominees than did the Gore and Bush campaigns.8
Besides broadcast ads, another form of issue advocacy, used by groups from unions
to the Christian Coalition, is distribution of voter guides, which present candidates’ stands
on issues in a way that arguably affects voters’ views of specific candidates.
Tax-Exempt Organizations. Raising particular concerns has been issue advocacy
by groups that are tax-exempt under the Internal Revenue Code, through section 501(c),
which otherwise bans involvement in political campaigns, or section 527, which allows
significant activity by “political organizations” as defined. In 2000, Congress required
periodic IRS disclosure by 527s not already filing at the FEC (P.L. 106-230).9
5 US F.E.C., FEC Reports Increase in Party Fundraising for 2000, May 15, 1999.
6 Annenberg Public Policy Center, Issue Ads@AAPC: An Online Tracking Study of Issue
Advocacy Advertising, [http://appcpenn.org/issueads/index.html] (visited Feb 2, 2001).
7 Brennan Center for Justice, Buying Time: Television Advertising in the 1998 Congressional
Elections, [http://www.buyingtime.org] (visited Jan. 19, 2001).
8 Ibid, [http://www.brennancenter.org/tvads2000.html] (visited Jan. 19, 2001).
9 For a discussion of issues surrounding 527s, see: CRS Report RL30582, 527 Organizations:
How the Differences in Tax and Election Laws Permit Certain Organizations to Engage in Issue
(continued...)

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Hard Versus Soft Money: Summary of Key Features
Hard Money
Soft Money
In general
Raised and spent for use in federal elections, per
Raised and spent for use in state and local
restrictions and regulation of federal election law
elections, per restrictions and regulation of state
laws, or in non-election advocacy; would not be
permitted if spent in federal elections (often
raised and spent in way that suggests intent to
indirectly influence federal races)
Must be used for express advocacy in federal
May NOT be used for express advocacy in
election (“vote for/ against” candidate), aimed at
federal elections if aimed at general public
general public (includes contributions to or
(unions and corporations may use express
coordinated with federal candidates)
advocacy to restricted classes)
Sources
- Individuals, PACs, and parties (subject to
Generally restricted only to extent of state laws;
contribution limits)
common sources: unions; corporations;
- Candidates, from personal funds (not subject to
individuals above $25,000 in a year
limits)
Disclosure
All receipts and expenditures must be disclosed
- Non-federal accounts of national parties and of
periodically to FEC, with itemization of amounts
state/local parties for spending on mixed
raised and spent above $200
activities—to FEC
- Union and corporate internal communications
over $2,000—to FEC
- IRC sec. 527 tax-exempt political
organizations—to IRS
- Some activities may be disclosed in states
Common Forms
Receipts and expenditures by: federal candidates;
Party soft money—raised by national parties
PACs (federal accounts); and party committees
through non-federal accounts and transferred to
(federal accounts; through contributions and
state parties for use in generic, party-building,
coordinated expenditures)
and voter operations; also used for a share of
issue ads and administrative costs
Labor/Corporate Exempt Activities— treasury
money allowed for spending aimed at restricted
classes on setting up and running a PAC; get-
out-the-vote and registration drives; and internal
communications (i.e., express advocacy)
Independent Expenditures—for express advocacy Issue Advocacy—by not using express advocacy
of election or defeat of federal candidate, not
language, groups and parties may use soft money
coordinated with federal candidate (no limit on
for public issue messages, independent of a
spending, but amounts must be disclosed; cannot
candidate (not federally regulated; generally not
be from prohibited sources or in amounts beyond
disclosed)
contribution limits)
Mixed Activities
Operations of parties (and some PACs) that benefit candidates at both federal and state/local levels;
subject to allocation requirements to insure only hard money is spent in federal elections; hence, a
certain percentage of expenditures by committees at any level must come from hard money, the rest
from soft money
9 (...continued)
Advocacy without Public Disclosure and Proposals for Change, by Marie B. Morris.