What the IRS scandal really shows us is that it's getting harder and harder to draw a line between electioneering and political speech.

As the report of the IRS Inspector General shows, the agency’s scrutiny of conservative groups applying for non-profit status was, more than anything, a clumsy response to a task the IRS is ill-equipped to carry out – monitoring an accidental corner of campaign finance law, a corner that was relatively quiet until about 2010.

That corner is the 501(c)(4) tax-exempt organization, belonging to what are sometimes called “social welfare” groups, which enjoy the triple privilege of tax exemption (though not for their donors), freedom to engage in some limited election activity, and, unlike other political committees (PACs, SuperPACs, parties, etc.), freedom from any requirement to disclose information about donors or spending. The use of (c)(4)s as campaign vehicles didn’t originate with the Citizens United decision in 2010 (Citizens United, the organization that brought the case, was already a (c)(4)), but the decision seems to have created a sense that the rules had changed, and even small groups – especially, apparently, local Tea Party organizations -- rushed to create (c)(4)s.

501(c)(4)s are not prohibited from engaging in political speech of most kinds. They are free to be “biased” without jeopardizing their tax exemption. They can advocate for or against legislation, they can lobby the government or criticize it. They don’t have to make any effort to be “nonpartisan” – for example, they can support a proposal that is only supported by members of one party, or directly advise only members of one party. And they can engage in some activity directly intended to influence the outcome of an election, as long as that doesn’t constitute the organization’s primary purpose.

There’s some confusion about the definition of “primary purpose,” discussed in great depth elsewhere, but what the IRS was trying to do was to identify organizations that seemed more likely to be heavily involved in electoral activity. Since the organizations were new, there was no way to look at their actual activities to see whether they were mostly electoral. So the agency had to rely on clues in the applications, like names and telltale phrases. If organizations had words like “Democrat” or “Republican” in their titles, for example, it would be reasonable to look more closely at their election activities, or possible future activities, than an organization that called, for example, “Save the Turtles.” I’m told that organizations with the names of political parties do receive extra scrutiny, even if in some cases, like “Students for a Democratic Society,” the word might mean something unrelated to the name of the party. That’s what the closer scrutiny would find out.

“Tea Party” in 2009 and 2010 was unquestionably an election category – there were “Tea Party” candidates and there was a “Tea Party Caucus” in Congress. It was not unreasonable for the IRS to use that phrase as an indicator that an organization using that phrase might be more inclined to engage in elections. There are comparable phrases on the left – for example, the term “Netroots” might suggest election involvement, as there were groups that identified and endorsed “Netroots” Democratic candidates in 2006 and later. Perhaps there were simply fewer organizations applying for (c)(4) status with that word, or they came in before the 2010 flood, or perhaps the IRS did screen on that word – we don’t know.

While there’s a perfectly plausible case for the IRS to use flag-words that indicate an election-focused movement, the actual questions asked of the groups do raise some concerns. If accurate, they did seem to go beyond evidence that these organizations were primarily engaged in elections, such as questions about lobbying and the role of family members.

But the reason these questions are complicated for the IRS, or for any agency assigned to police these complicated distinctions, is this: the line between robust political speech and influencing elections has become frightfully difficult to draw. Finding the right line around what is an “election” is really the fundamental problem in campaign finance. Almost everyone accepts the premise of “electoral exceptionalism” – elections are structured and require some particular rules, different from the rules that apply generally to political speech. The rule in most states that keeps campaigners 75 or 100 feet from the voting booths is the most obvious uncontroversial restriction on political speech, and there is broad acceptance of the idea that direct contributions to candidates and campaigns should be limited to prevent corruption and dependence. But what happens after that? What about outside spending that looks just like campaign spending? We used to think there was a clear distinction between “issue ads” that were expressing a view on an issue and “electioneering communications” that were the equivalent of campaign contributions. That distinction is actually what the Citizens United case was about -- the provision of the 2002 Bipartisan Campaign Reform Act that defined broadcast communications that mentioned a candidate within 30 days before a primary or 60 days before a general election as electioneering, which had to be financed with regulated funds.

That was an improvised line then, and it’s gotten even blurrier since. Part of the problem is partisanship – it used to be, for example, that there were environmentalists in both parties, supporters of social spending in both parties. A political ad about the environment was just that. But what’s an ad or brochure attacking “Obamacare” during the election year? Every Republican opposes it, and they’ve given it the name of the president. The Tea Party was based on issues, yes, but above all else, it was based on unflagging, total opposition to Obama and congressional Democrats.

To figure out where election advocacy begins and regular political speech ends in these cases was certainly more than mid-level IRS bureaucrats in Cincinnati could handle. But it’s not an easy challenge for anyone. All the noise about IRS “targeting” and about free speech and corporate speech is a distraction from a real challenge of money in elections: finding an agreement on the line around an “election,” and establishing some clear rules for what happens within that line in order to ensure that elections are fair and open and don’t lead to corruption. 

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

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Few on the left were happy with the Supreme Court's ruling in Citizens United that paved the way for so-called corporate personhood and opened the floodgates for money in politics. But taking that frustration and focusing it solely on a constitutional amendment is misguided, as Senior Fellow Mark Schmitt told Democracy Now. "I view it as a real distraction from some of the progress that we can make on money in politics," he explained. The amdendment is "sending the wrong signal to people and overlooking the tremendous progress that’s actually being made…on public financing that offsets the role of money from individuals and money from big corporations."

And there's a lot of hope in public financing for money in politics reformers. "We’re really undergoing a grand experiment of how much we can do with public financing of elections," Schmitt says. "I think we’re beginning to find that those systems that either provide a fixed amount of money to candidates who agree to forgo most private money or that match small contributions…those can really help candidates get to the point of being heard without turning to big money and get them enough that they’re not necessarily shot down by big money." Systems in New York City, Arizona, Minnesota, and Connecticut are all working, he said: "These systems are popular, they’re resilient, they withstand legal challenges, and that’s really where the energy ought to be focused at this point."

While he understands the appeal of a constitutional amendment -- "it’s easy to get people to sign a petition for it because it sounds very clear cut" -- the slow and perhaps even impossible progress on this front could send the signal that nothing can be done. "The message it sends is we can’t do anything until we have a constitutional amendment," he said, which is "exactly the same as saying we can't do anything."

Current limits on money in politics being tested across the country should give reformers hope.

Last Monday, the Supreme Court declined to hear a case challenging the century-old ban on direct corporate contributions to federal election campaigns. That counts as good news in a month that included the court’s earlier decision to hear a case that challenges the aggregate contribution limits in campaign finance and Obama strategist David Axelrod declaring that he would prefer a system of unlimited contributions with full disclosure. Almost all Republicans, the Supreme Court, and a powerful faction of the Democratic Party now fall somewhere on the spectrum between skepticism and vehement opposition to limits on contributions. The flimsy remains of the post-Watergate system of campaign finance regulation are on the verge of collapse.

Richard Hasen, law professor and proprietor of the indispensable Election Law Blog, argued in Slate last week that there was still hope for campaign finance reform – just not until Justice Antonin Scalia leaves the court. But there are other reforms currently being tested on the ground that hold out hope for changing the power of money in politics.

Hasen is right, of course, that until at least one of the five members of the Citizens United majority leaves the court by death or retirement and is replaced by a Democratic appointee, the best hope is that it will rule narrowly in cases such as the one involving aggregate contribution limits, rather than using them as opportunities, as they did in Citizens United, to punch holes in the law that are bigger than the cases themselves. He’s also right that expecting a constitutional amendment to overturn Citizens United (or do various other things, depending on the version) is far less likely to reopen the path toward a reasonable balance of the role of money in politics than a change in the membership of the court.

Hasen proposes that campaign finance reform advocates take the time now “to plan for the next Supreme Court.” We should use the indefinite waiting period to “think more about what a reasonable campaign finance regime would look like” and acknowledge that “conservatives are absolutely right that campaign finance laws can boost incumbents and stifle political competition.”

I agree with Hasen on all of that, even the last points, but I’d go even further: A reasonable campaign finance regime, one that doesn’t boost incumbents or stifle competition, could even be put in place with the existing Supreme Court. (The current Congress is another story.) The thinking he’s proposing is going on right now, and is even being tested, in systems based on the principle of “small-donor public financing.” These systems use some combination of matching funds, tax credits, vouchers, or generous public financing for candidates who show a base of small-donor support. They make it easier for candidates to run who don’t have big-donor support in order to enhance public participation and to ensure that elected officials aren’t entirely dependent on big donors or corporations, whether those donors are giving directly to campaigns or to outside groups.

The public financing systems in Arizona, Maine, and Connecticut, which have been resilient, strongly supported by the public, upheld in the courts, and used by almost as many Republicans as Democrats, fall into this category. So does the generous matching system in New York City that has the support of Governor Andrew Cuomo and a growing number of legislators, which can serve as a model for legislation elsewhere. So can Minnesota’s system, which is currently unfunded but which until a few years ago offered a quickly refundable tax credit for small contributions along with a match on the candidate side. All of these systems can be considered part of a broad experiment, and scholars are looking closely at them to see whether they change who runs for office, who donates, and ultimately whether the states’ political processes are more responsive to the public.

Legislation at the federal level has followed the small-donor model as well. Rep. John Sarbanes’ Grassroots Democracy Act, for example, draws on elements from several of the successful state programs, including a refundable tax credit for small donors along with a matching program for campaigns. The Fair Elections Act similarly incorporates a combination of small donor incentives with full public financing. A voucher that would allow every citizen to contribute in the same way that she votes, long advocated by Yale Law Professor Bruce Ackerman who calls them “Patriot Dollars,” and more recently by his Harvard counterpart Lawrence Lessig, is attracting renewed interest as well.

All these systems are voluntary, and alone they don’t go too far toward controlling big money, except for the candidates who participate. But they do make it possible for candidates to run who wouldn’t be able to otherwise or who want to run independently of big money. If they’re designed well, they can help candidates be in the position to get their messages out, and at a certain point it doesn’t matter all that much if the other candidate has a lot more money or more outside money spent on her behalf. (The Brennan Center put out an excellent report in 2011 on the many positive effects of small-donor public financing.)

The big question is whether these systems can work without limits on outside money. Without limits, candidates might hesitate to participate, voluntarily limiting their own spending, if they worry about being overwhelmed by big outside campaigns. It’s also unlikely that the public will support throwing good money into a cesspool of unregulated spending for very long. If that’s the case, these systems will need backup from the kind of limits that are under challenge in the recent cases or rejected by the court in Citizens United or other cases. But even after the court rejected a feature of the Arizona system that gave candidates more money if they were attacked by outside money, the system survived, and a majority of candidates for statewide office in 2010 and 2012 participated in the system.

The 2012 federal elections offered even more evidence that small-donor systems can work. It was not that “money doesn’t matter” (a view challenged by Roosevelt Institute Senior Fellow Thomas Ferguson and colleagues here), but rather that once a candidate for the House, Senate, or lower office has reached the threshold that allows him to be heard, extra money on the other side, whether from outside groups or the opposing campaign itself, matters less. For example, all the Senate candidates hit with outside spending by the Sheldon Adelson and Koch Brothers-funded groups won reelection. If small-donor public financing can get candidates to that threshold, then limits on outside spending won’t be as important in making the system work.

That’s not to say that it isn’t worth trying to strengthen the limits that remain and to build on the broader consensus that supports disclosure. In particular, the Internal Revenue Service should enforce the law governing 501(c)(4) non-profits, which are increasingly being used as vehicles for undisclosed and unlimited campaign spending, but which are not permitted to have influencing elections as their “primary activity.” The sheer number of mechanisms by which a donor can try to influence the outcome of an election has proliferated so far beyond the old standby of broadcast advertising that it will be impossible to chase it all down.

The next generation of campaign finance reform doesn’t have to be developed in a laboratory while waiting for Scalia or one of his colleagues to retire or to encounter a higher judge. It’s being designed, refined, tested, and improved as you read this in a half dozen states and municipalities. If it works, it will lead us to a system that will moderate the influence of economic inequality on democracy while enhancing competition and strengthening First Amendment rights of free expression. 

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

As part of our series "A Rooseveltian Second Term Agenda," an acknowledgment that the election didn't just showcase the problems of outside money in campaigns, but a potential way forward.

It's been tempting to treat the 2012 election as proof that money in politics doesn't matter as much as commonly believed, or that Citizens United and the emergence of Super PACs and political non-profits didn't change things as much as predicted. “Effect of 'super PACs' proved to be less than expected,” the Los Angeles Times declared in a post-election headline.

It is true that the presidential candidacy most dependent on Super PACs and other “dark money” support was soundly defeated, and the same was true of the Senate candidates backed by Karl Rove's American Crossroads and related groups. Prophecies that corporate money would flood in and swamp the candidates, particularly Democrats, didn't come true. (Some of us were always skeptical of this prediction.) And it turned out the Super PACs had some particular disadvantages because they couldn't purchase media time at the favorable rates that are available to campaigns. The Republican dark money committees' focus on broadcast advertising to the exclusion of other campaign activities turned out to be misplaced in an election where the “ground game” of identifying voters and getting them to the polls is what mattered. (It's also likely that the Republican Super PAC operators focused on radio and television because there are financial incentives for consultants to buy media and collect a commission of 10 or 15 percent. Voter mobilization efforts don't have the same payoff.)

But a general election presidential campaign, and even a high-profile Senate campaign, is not where we would expect to see the decisive power of money in election outcomes. Presidential candidates, especially incumbents, are well known and have ample opportunity to get their message out without paying for it. For example, half the number of people who voted watched at least one of the presidential debates. Money is more significant in determining who has an opportunity to run for office and whether that candidate has sufficient resources to be heard.

This year's elections for the House showed just how much money still matters. More than nine out of ten incumbents were reelected, despite a backlash against the Republican House reflected in the aggregate vote (48 percent to 47 percent). While some of this incumbent advantage was a result of redistricting that entrenched Republican seats, a great deal of incumbent advantage involves money that incumbents can raise from lobbyists and few challengers can. According to the Campaign Finance Institute, incumbents who won with more than 60 percent of the vote, which accounts for more than two-thirds of races, outspent their challengers by a factor of nine. Notably, most of the seats captured by Democrats in this cycle involved very high-profile Tea Party Republicans like Allen West of Florida or Joe Walsh of Illinois and opponents who were either well known in progressive circles, such as Walsh's successful opponent Tammy Duckworth, or former members of Congress with established fundraising bases. In many of those high-profile races, such as West's, outside groups played a large role. Data from the Campaign Finance Institute indicates that successful challengers spent $2 million, suggesting that that is the new price of entry for a viable campaign, although this will vary greatly by region.

But even these results show some hope. Many of the successful Democratic candidates, like President Obama, were able to build strong bases of small donors. While Obama's small donors accounted for 44 percent of his total, Duckworth, for example, raised 37 percent from small donors. The small donor era, which began in 2008, has continued in both parties. This suggests that the best path to making elections competitive and offsetting the influence of big money, outside money, and dark money is to enhance the value of small contributions. This can be done through a matching program such as New York City's successful model, the proposed Fair Elections Now Act (supported by a majority of Democrats in 2010), or Rep. John Sarbanes' Grassroots Democracy Act.

Since Citizens United, many reformers have worried that such initiatives would be rendered ineffective by the flood of big money, which would overwhelm the small donors, or that candidates would resist participating in these matching programs, fearing big outside money attacks. That would argue for pursuing a remedy for Citizens United, in the Constitution or the Court, before moving on to matching fund public financing. But the election results, in which neither Obama nor successful candidates for House and Senate were overwhelmed by outside money, indicates that these systems are likely to be more resilient than we think. Giving every candidate the opportunity and encouragement to build a participatory base of small donors isn't the only thing we need to do to offset the influence of money in politics, but it is a good start. House minority leader Nancy Pelosi identified campaign finance reform as a major priority for her caucus in the next Congress. The first step is to reach consensus on what is to be done, and the election points in a clear and positive direction toward solutions that encourage participation and grassroots campaigns.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.