TAX CODE TWO-STEP

How Elite Wisconsin Donors Are Dancing Around the Federal Soft Money Ban

July 6, 2004

Introduction

Organizations known as 527s, which are tax-exempt political nonprofit groups that get their name from the U.S. Internal Revenue Service code under which they are organized, have bolted onto the 2004 election scene. The chief reason is the Federal Election Commission has refused to regulate them in the wake of the new Bipartisan Campaign Reform Act - also known as the McCain-Feingold campaign finance law - which prohibits national party committees from accepting and spending unlimited and anonymous contributions known as "soft money" from wealthy individuals, corporations and unions.

The 527s, which include the electioneering arm of MoveOn.org, America Coming Together, GOPAC and the Club for Growth, raised nearly $179 million and spent about $157 million in soft money between January 2003 and March 2004.

These 527 organizations cannot use this unregulated money to contribute directly to candidates, but they can use it for practically any other election-related activity, including direct mail campaigns, negative issue advertising and voter registration drives. Much of their spending during the past several months has been used for television advertising nationally and in Wisconsin, mostly to criticize President Bush.

It is inevitable that the flow of special interest cash to 527s will grow to fuel their electioneering activities, particularly in Wisconsin which has been identified as one of 17 swing states that will decide the election between Bush and Democratic rival John Kerry. The unfortunate consequence of these unbridled groups is that they are being used by a handful of wealthy special interests to usurp the role of the state and national parties and, in doing so, hijack the election from the voters and the candidates.

The purpose of this report, "Tax Code Two-Step," is to identify the individuals, corporations and unions from Wisconsin that are contributing to 527s throughout the country. In some cases 527 groups, like MoveOn.org, are also organized under IRS 501(c) tax rules. Contributions made to a 501(c) group or an organization’s 501(c) account are supposed to be used for educational and lobbying activities and do not have to be publicly disclosed in IRS reports like 527 contributions for electioneering activities.

Key Findings

WDC’s review of 527 reports found that:

  • Wealthy individuals, corporations, trade groups, unions and political committees in Wisconsin contributed $565,397 to 527 groups in 2003 and the first three months of 2004.
  • Although Democratic-leaning 527s are raising much more money nationally than Republican-leaning 527s, Wisconsin contributors sent more money to Republican 527s in 2003 and the first quarter of 2004.
  • As with direct contributions to state and federal candidates, most of the contributions to 527 groups are from contributors in Milwaukee and Madison.

Wisconsin-Based Contributions to 527s

Through March 2004 - the first 15 months of the 2003-04 election cycle - contributions from 142 Wisconsin contributors to 527s totaled $565,397.41, according to WDC’s review of 132 groups that accepted contributions during the period.

That is an average of $3,982 per contributor - nearly double the $2,000 limit for direct contributions an individual can make to a federal candidate. Corporations and unions cannot contribute to federal candidates from their treasuries.

One hundred seven individuals contributed $163,020; 29 corporations and trade groups doled out $300,844; three unions contributed $92,033.41; and three political and candidate committees contributed $9,500 (see Chart 1 below).

Chart 1

Origin of Wisconsin Contributions to 527 Groups

Leading the list of individual contributors was Mary Kohler, of Sheboygan, who is public affairs director of Windway Capital Corp. at $30,500 (Table 1). Mary Kohler is the wife of Terry Kohler, president of the company and an unsuccessful candidate for governor in 1982, who contributed $25,000 to 527s. In addition, a $10,000 contribution to the groups was made by their company. Their contributions went to the Republican Governors Association, South Dakotans for Responsible Government and two other 527s backing conservative Republicans - GOPAC and the Club for Growth. The Kohlers are longtime generous supporters of conservative Republican causes. Together with their company, they contributed $1.15 million to GOP national committees and state parties from 1997 through 2002, according to a 2003 Institute on Money in State Politics study.

Leading the list of corporate contributors (Table 2), who are prohibited from making contributions directly to candidates and the national parties, was Milwaukee-based Johnson Controls Inc., which made $116,945 in contributions to 527s during the period. The company, a worldwide leader in automotive systems and building controls with $22.6 billion in sales in 2003, contributed a total of $81,945 to the Republican Governors Association and $35,000 to the Democratic Governors Association.

Three state unions made contributions to their national headquarters which engage in 527 activity. Topping the list was the Wisconsin Laborers District Council which sent $77,979 to the Laborers Political League Education Fund, followed by Ironworkers Local 383 which contributed $12,823 to the Ironworkers Political Education Fund and the Service Employees International Union Local 1199 in Wisconsin which sent $1,231 to the SEIU Political Action Fund.

Three political committees made contributions to Democratic-leaning 527 organizations, including the Campaign Fund of Northwestern Mutual Life Political Action Committee (PAC) which gave $5,000 to the Democratic Governors Association. Democratic Governor James Doyle’s campaign committee gave $3,500 to the Democratic Governor’s Association and the National Funeral Directors Association PAC gave $1,000 to the Democratic Majority PAC.

It is unclear where Wisconsin’s contributions stand relative to other states because no organization except WDC has undertaken a complete review of state contributions to 527s during the period. One organization, Political Moneyline, tracks contributions of $2,500 or more by state to 527 groups and ranks Wisconsin’s $346,500 in large contributions 25th among the states and the District of Columbia.

Republican Versus Democratic 527s

Much of the $179 million raised by 527 groups between January 2003 and March 2004 went to Democratic-leaning 527s, according to the Center for Public Integrity. Democratic 527s have raised about $141 million compared to about $38 million by Republican-leaning 527s (see Chart 2 below).

Chart 2

National 527 Fundraising

However, Republican-leaning 527s have had better success raising money in Wisconsin than Democratic groups in 2003 and the first quarter of 2004. Wisconsin contributors gave $565,397 to 22 groups during the period (Table 3).

A review of those 527s shows that $316,754, or 56 percent of the contributions, went to Republican 527s compared to $247,593, or 43.8 percent of the contributions that went to Democratic-leaning 527s (see Chart 3 below). One group which received $1,050 from state contributors, or 0.2 percent of the contributions, appeared to nearly equally support both Democrats and Republicans.

Chart 3

Wisconsin 527 Fundraising

Most of the contributions from Wisconsin went to two of the top fundraising 527s on the national scene - the Republican and Democratic governors associations. WDC found that the Republican Governors Association received $157,250 from Wisconsin contributors and the Democratic Governors Association received $129,550. Collectively, those contributions represent 51 percent of the total 527 contributions from Wisconsin.

527 Territory

As with direct contributions to state and federal candidates, a large amount of Wisconsin contributions to 527 groups come from contributors in Milwaukee and Madison.

A review of 527 contributions by zip code shows that seven of the top 10 zip codes cover portions of Milwaukee, Madison and their wealthy suburbs (Table 4). Two of the top 10 zip codes cover Sheboygan where contributors sent national 527 groups $76,750. Most of that money, $74,500, came from only four contributors - Terry and Mary Kohler, their Windway Capital Co. and the Sheboygan Oral and Maxillofacial Association.

The zip code with the largest amount of 527 contributions was 53202, which covers a portion of downtown Milwaukee’s business district, at $96,032. The top contributors from that zip code were Johnson Controls where $75,350 of its $116,945 in total 527 contributions originated; the Foley & Lardner law firm which contributed $7,500; and Schlitz brewing heiress Lynde B. Uihlein who contributed $6,000.

The second highest contributing zip code was 53713 which includes portions of Madison, Fitchburg and Monona, at $80,160. The bulk of those contributions came from the Wisconsin Laborers District Council at $77,979. The third highest contributing zip code was 53201 which covers a portion of downtown Milwaukee, at $68,219. The largest 527 donors in that zip code were Miller Brewing Co. at $32,074, Wisconsin Energy Corp. at $25,395 and Kohl’s Corp. at $10,000.

Methodology

Since August 2000 when the IRS required tax-exempt nonprofits to file financial activity reports known as 8871 and 8872 forms, more than 20,000 groups have registered as 527 organizations. However, most of these are not true 527 organizations because they already file reports with state or federal election authorities, including committees controlled by political candidates and special interest political action committees. In Wisconsin, 171 such committees also file 527 reports, however none of them are true 527 groups.

WDC chose to use the list of true 527 groups compiled by the Center for Public Integrity to determine how much unregulated money is coming from Wisconsin donors. The center’s definition of a true 527 group is: a committee that is active in many states and spends most of its money on election-related activities including broadcast advertisements, mailings and political research; or a committee that is not required to file reports with state or federal election authorities; or a committee that is associated with or formed by a federal lawmaker.

WDC staff compiled this report by reviewing thousands of pages of IRS records filed by 132 groups in 2003 and the first three months of 2004 and posted on the IRS web site.

TablesPress Release