In The Federalist (No. 10), James Madison famously worried about faction. He was most concerned about what would happen if a faction consisted of a majority of the population. In contrast, if the faction were to consist of less than a majority, Madison had faith that majority vote would defeat its “sinister views.”
Today we are perhaps less sanguine about the ability of the majority to block special interest groups. The process of lobbying, whereby organized groups attempt to pass, block or change pending legislation by contacting legislators and staffers and urging the public to do the same, is a multibillion dollar industry ($3.6 billion in 2009), and it appears to yield a very good return on investment.
It is no wonder that reining in some of the excesses of lobbying is one of the few issues on which most Republicans and Democrats agree, at least in principle. As a presidential candidate, Barack Obama declared, “If you don’t think lobbyists have too much influence in Washington, then I believe you’ve probably been in Washington too long.” He explained his refusal to take campaign contributions from federally registered lobbyists on grounds that lobbyists can “drown out the views of the American people.” As President, he has criticized an “army of lobbyists” who spent millions of dollars in an unsuccessful attempt to block passage of a bill reforming practices in the student loan industry.
Sarah Palin also blames lobbyists for the country’s woes. When Fox News host Sean Hannity asked her if campaign contributions to then-Senator Obama and other members of Congress caused lax congressional oversight over mortgage giants Fannie Mae and Freddie Mac, Palin replied that “the role that the lobbyists play in an issue like this is more significant than the role of contributions” because “the cronyism” is “symptomatic of the greater problem that we see right now in Washington, and that is just that acceptance of the status quo.” In a Facebook post, she explained further that when it comes to financial reform, “the big players who can afford lobbyists work the regulations in their favor, while their smaller competitors are left out in the cold.”
In the face of the financial crisis, partisan recriminations and other problems of contemporary American governance, some have urged limits on lobbying in order to promote the public interest. They fear not only potential lobbyist corruption, but also lobbyists facilitating a raiding of the public fisc. Thus, noted Tea Partier and incoming U.S. Senator from Kentucky Rand Paul has advocated that any government contractors with contracts worth at least $1 million be barred from lobbying or making campaign contributions. But excessively strict limits on lobbying may actually threaten good public policy. Lobbyists provide legislators and other government officials with crucial information and convey the points of view of important constituencies. A responsive government needs to hear various viewpoints, and in a complex world legislators and staffers need help analyzing, and even writing, important legislation. It is hard to imagine the U.S. government today functioning without lobbying. Moreover, lobbying also enjoys constitutional protections. The First Amendment guarantees both free speech and the right to petition the government.
We as a nation long have struggled with how to strike the proper balance between respecting lobbying as a constitutionally guaranteed and pragmatically useful activity and ensuring that the private interests of the wealthy and well-organized do not manipulate and foil efforts to promote the public good. As elaborated below, Congress has tried limiting tax deductions for lobbying expenditures and mandating disclosure requirements. Neither of these has worked very well, however, and episodic scandals such as the Jack Abramoff/Michael Scanlon affair of 2004 have led to calls for further regulation. For example, the Federal government recently turned its focus (by both legislation and Executive Order) to regulating more directly interactions between government officials and lobbyists.
The most recent attempt to turn the screws on lobbying may be met with constitutional skepticism as a result of the Supreme Court’s January 2010 decision in Citizens United v. Federal Election Commission. Citizens United is almost universally thought of as a campaign finance case, not a lobbying case, but its reach is far wider. Lower courts in two cases we describe further below have already struck down some core lobbying regulations for violating the First Amendment as the Supreme Court interpreted it in Citizens United. More cases could well be decided in similar ways. In the end, the reach of Citizens United may be even broader than most of us initially understood; it may influence not only who gets elected but also the ability of interest groups to pressure Federal officials in connection with particular legislative issues.Regulating Lobbying through Tax Law
The Federal government’s first efforts to regulate and limit lobbying came in the form of two sets of tax rules. One set, dating from 1918, just a few years after ratification in 1913 of the 16th Amendment allowing an income tax, denies a business deduction for the costs of lobbying. The other set, dating from 1919, limits the amount of lobbying allowed for organizations exempt under section 501(c)(3), which entitles them to accept tax-deductible charitable contributions (the organizations we typically refer to as “charities”). By denying or limiting the deduction for funds used to lobby, these rules in effect made lobbying more expensive. A series of court cases have found no constitutional barriers to either set of rules, but neither set appears to have limited the steady growth of lobbying activities. The elasticity of demand for lobbying thus appears to be quite small: Clients have been more than willing to pay increased costs for benefits that they judge to be indispensable.
Let’s look more closely at the history.
Business Deductions for Lobbying: Treasury Department rules denied business deductions for lobbying expenses on the grounds that they were not ordinary and necessary expenses, as the statute required. This rule stood without challenge for many years, but a 1959 Supreme Court case, Cammarano v. United States, tested it. In the end, the Justices rejected (among other arguments) a First Amendment challenge to non-deductibility rules for business lobbying expenses. The Court decided that the tax treatment was valid based on Congress’s determination that,
since purchased publicity can influence the fate of legislation which will affect, directly or indirectly, all in the community, everyone in the community should stand on the same footing as regards its purchase so far as the Treasury of the United States is concerned.
The taxpayers were “not being denied a tax deduction because they engage in constitutionally protected activities;” instead, they, like everyone else engaged in these activities, must pay for them “entirely out of their own pockets.”
The Supreme Court in Cammarano extolled equal treatment of all taxpayers, but its vision of equality seemed confused at best. It trumpeted this conclusion despite the fact that at the time of the case supporters of charities could, to at least a limited extent, support lobbying with deductible contributions. It assumed, without discussion, that the deduction for business lobbying expenses should be judged against the treatment of lobbying costs by all other persons, whether individuals, tax-exempt organizations or for-profit entities, rather than against the treatment of other business costs by businesses. It ignored the fact that individuals and businesses are not similarly situated for tax purposes. We tax businesses, including sole proprietors, on their net, not their gross, income. Businesses are generally permitted deductions for the costs of producing income while individual deductions fall far short of the cost of personal, living or family expenses.
Congress recognized this justification for business deductions of lobbying expenses in 1962. It enacted a statute that permitted a deduction for direct lobbying expenses—that is, for the expenses of lobbying committees or members of legislatures and their staffs, precisely because such a deduction “is necessary to arrive at a true reflection of [a business’s] real income.” The legislative history of the 1962 provision also illustrates the concern that, under the old rules, the costs of contact with the Executive and Judicial Branches could be deducted, but not the costs of contact with the Legislative Branch, a distinction that did not make a great deal of sense.
For some thirty years, then, the tax code permitted direct lobbying expenses as a business deduction. Expenses for grassroots lobbying—the cost of contacting members of the public to urge them to contact their legislators—continued to be nondeductible. In 1993, however, Congress returned to the structure of the original regulations, amending the provision to deny the deduction for both direct and grassroots lobbying. The legislative history of the 1993 amendments gives little reason for this congressional change of heart. The House Report spoke of revenue concerns: “The Committee has determined that in the context of deficit reduction, it is appropriate to limit the business deduction for lobbying expenses.” Earlier that year, however, Treasury’s explanation of the Clinton Administration’s revenue proposals stated, “The deduction for lobbying expenses inappropriately subsidizes corporations and special interest groups for intervening in the legislative process.”
The 1993 legislation disallowed for the first time a deduction for lobbying top Executive Branch officials. It permitted a deduction for lobbying local government, probably on the grounds that it is often difficult to distinguish between legislative and administrative functions at that level. The same legislation also introduced elaborate rules applicable to non-charitable exempt organizations such as social welfare organizations (section 501(c)(4) organizations), unions and trade associations. These organizations are not themselves limited in the amount of lobbying they can undertake so long as the lobbying is related to their tax-exempt purpose. Under the 1993 provisions, however, they must choose between notifying their members of the percentage of their dues or similar fees that cannot be deducted because they were spent on lobbying or political activities, or they themselves must pay a proxy tax on the amounts spent for such activities. Subsequent administrative rulings exempt certain of these organizations, including labor unions, from these notice or proxy-tax provisions.
The law enacted in 1993 continues unchanged today. The tax code permits no business deduction for expenses related to lobbying the Federal government. Again, however, there is little evidence that increasing the after-tax cost of lobbying as compared to other business expenditures has reduced the amount of lobbying that businesses conduct. That lack of evidence in turn suggests that the law (inadvertently, one presumes) benefits larger and more sophisticated businesses over smaller ones.
Although it is generally difficult to measure the financial benefits of lobbying, one recent study found that companies which lobbied for a provision in the 2004 American Jobs Creation Act permitting tax-free repatriation of foreign earnings benefited from a 220 percent return on their investment. Not bad, especially compared to most other investments.
Charitable Organizations and the Charitable Deduction: Treasury regulations dating before the 1920s specified that the distribution of any “controversial or partisan propaganda” was inherently not educational and disqualified a charitable organization for tax exemption. In an influential 1930 case from the United States Court of Appeal for the Second Circuit Court, Slee v. Commissioner, Judge Learned Hand disallowed deductions for gifts to the American Birth Control League because the League’s charter included lobbying as an independent mission. Judge Hand wrote, “Political agitation as such is outside the statute, however innocent the aim. . . . Controversies of that sort must be conducted without public subvention; the Treasury stands aside from them.”
Much ink has been spilled trying to parse Judge Hand’s words, but he has come to be understood as endorsing a policy of government neutrality in legislative controversies. In 1934, Congress entered the fray. It drew a line through the Internal Revenue Code by requiring that no organization could be a tax-exempt charity if a substantial part of its activities consisted of “carrying on propaganda, or otherwise attempting to influence legislation.” Statements in the Congressional Record speak to a concern that charities in general would use tax-deductible contributions to lobby on behalf of the personal interests of their donors. Permitting some lobbying by organizations eligible to receive tax-deductible contributions, however, undermined the neutrality Judge Hand had endorsed in Slee.
Congress further tightened these limits on charitable lobbying in 1969, at a time when businesses were permitted to deduct lobbying costs. It enacted a provision that, for all practical purposes, imposes an absolute ban on lobbying by one category of section 501(c)(3) organizations, private foundations. Private foundations are charitable organizations that, in general, rely on and are controlled by a single group of donors, often a wealthy individual, family or corporation. Congressional hearings had focused on concentrations of social and economic power by private foundations such as the Ford and Rockefeller Foundations, including use of their wealth to influence legislation. The lobbying prohibition was one of several provisions enacted to regulate private foundations.
While private foundations found themselves forbidden to lobby, other 501(c)(3) organizations subject to the “no substantial part” test struggled to comply and understand its vague and uncertain stricture. There was not then, and there is still not today, any clear guidance as to what “substantial” means. In response to organizations that desired greater certainty and freedom to lobby, Congress in 1976 enacted an elective regime permitting charities that so chose to be subject to a specific dollar limit, on a sliding scale according to their total budgets, for their lobbying expenditures. The maximum amount of lobbying permitted under the elective regime is $1 million, which an organization reaches when it has a budget of at least $17 million.
After first proposing controversial regulations that would have broadly defined what constituted lobbying for the purposes of this elective regime, the Treasury Department issued regulations that defined both direct and grassroots lobbying quite narrowly for charities that make this election. Thus, many issue-related activities conducted by such charities are not considered lobbying and thus are not subject to any limit. Nonetheless, very few charitable organizations—no more than 1 to 2 percent, and very few large charitable organizations in particular—make this election, especially because the dollar limits are not inflation-adjusted.
Not until 1983, however, did the Supreme Court consider a constitutional challenge to the limit on substantial lobbying by 501(c)(3) organizations. Regan v. Taxation with Representation rejected a First Amendment challenge on the grounds that “Congress has merely chosen not to pay for TWR’s lobbying.” Congress, the opinion explained, is not required to subsidize First Amendment activity and can choose to subsidize lobbying less extensively than other activities that 501(c)(3) organizations undertake. The opinion noted that the 501(c)(3) organization could form a 501(c)(4) affiliate that could lobby without limit but would not be eligible to receive tax-deductible contributions.
Thus, while excess lobbying by a 501(c)(3) organization can result in its loss of exemption, the ability to create paired 501(c)(3) and 501(c)(4) organizations avoids such a result, although the two organizations must be separately organized and take care that no tax-deductible funds support lobbying beyond permissible limits. Such a pairing is in fact quite common. The Sierra Club, for example, lost its exemption because of excess lobbying in 1966; today, it is a section 501(c)(4) organization, free to lobby without limit but unable to accept tax-deductible contributions. The Sierra Club Foundation, however, is a section 501(c)(3) organization with a stated mission “to educate, inspire and empower humanity to preserve the nature and human environment.” It can accept tax-deductible contributions. Similarly, the American Civil Liberties Union and the ACLU Foundation are paired 501(c)(4) and 501(c)(3) organizations, as are the National Rifle Association and the NRA Foundation.
With charities as with businesses, the government over time has, with some exceptions, worked to tighten or at least clarify the limits on deducting amounts spent on lobbying. Such efforts, however, seem to have had little impact on the amount of lobbying undertaken by larger and well-advised organizations, although many argue that the uncertain reach of the “no substantial part” test deters smaller, local or less wealthy 501(c)(3) organizations from engaging in any lobbying. As a result, the law as currently written and understood mutes the voice of the poorer non-profits, just as higher costs for business lobbying disadvantages smaller, less well-capitalized businesses.Disclosure Rules
Aside from a short-lived lobbyist registration requirement that lasted only as long as the 44th Congress, Congress did not pass a non-tax bill addressing lobbying until 1946. The Federal Regulation of Lobbying Act imposed registration requirements for those who lobbied Congress, as well as a requirement of quarterly reports of money spent and received for lobbying activities. The Senate Report described its purpose as promoting publicity, or what we would today call transparency. It saw its efforts as a “mild step forward in protecting government under pressure” from “swarms of lobbyists seeking to protect this or that small segment of the economy or to advance this or that narrow interest”, making it difficult for legislators “to discover the real majority will and to legislate in the public interest.”
The 1946 Act suffered from a number of drafting problems, however, and the Supreme Court in United States v. Harris, faced with a First Amendment challenge, significantly rewrote and narrowed the statute. Although the statute as written applied its disclosure requirements to the raising and spending of funds for the purpose of influencing congressional action “directly or indirectly”, the Court construed this language narrowly to refer only to directly communicating with members of Congress on pending or proposed Federal legislation. It further limited the reach of reporting requirements to those persons who solicited, collected or received contributions of money for such a purpose, and only so long as such lobbying was one of the main purposes of the contributions. It held that the rewritten disclosure statute afforded Congress the power of self-protection without offending the First Amendment. In truth, however, its interpretation made the statute ineffective as a disclosure mechanism.
It took another forty years before Congress imposed new lobbying disclosure requirements. Congress passed the Lobbying Disclosure Act of 1995 (“LDA”) on a unanimous vote of 421–0 in the House and 98–0 in the Senate, but only after overcoming serious opposition from the Republican Party. It passed only after supporters gave their assurance that the bill did not seek to require disclosure by those engaged in “grassroots lobbying”, which Republicans sought to protect both for ideological reasons and likely out of a belief that such activities disproportionately benefit them.
The LDA improved on the 1946 Act in a number of ways. It applies to lobbying not just members of Congress, but their staffs as well. It covers lobbying of the Executive Branch; and it expands the scope of who needs to register as a lobbyist and what information needs to be included in filed reports. Along with other Federal laws, particularly the so-called Byrd Amendment prohibiting the use of funds appropriated by Congress to lobby for any Federal award, it provides the current legal framework for all Federal lobbying regulation.
Although the LDA certainly required more disclosure than the 1946 Act, it still imposed a relatively weak enforcement regime. The required format was difficult to follow and the required disclosures minimal—little more than the stating generally that the lobbying activity contacted the House of Representatives, the Senate or a particular Federal agency, such as the Department of Defense. It did not require naming the specific legislators, committees or Federal employees contacted. Notably, however, the LDA has enabled us to gauge the magnitude and growth of dollars spent on lobbying, providing the basis for the data on the extent of lobbying and lobbyist activities we presented above.Beyond Tax Law and Disclosure
In 2007, Congress again revisited lobbying regulation, prompted in large part by the 2004 Jack Abramoff scandal. Abramoff had arranged lavish trips abroad for members of Congress, including then-House Majority Leader Tom DeLay, and enriched himself at the expense of various Native American tribes that were his clients. He eventually pleaded guilty to charges of fraud, tax evasion and conspiracy to bribe public officials.
A legislative stampede to regulate lobbying soon followed. By the time the dust had settled, Congress had passed the Honest Leadership and Open Government Act (HLOGA). HLOGA strengthened the 1995 LDA through expanded disclosure requirements for lobbying coalitions; it mandated a new reporting system for lobbyist contributions and disbursements to or on behalf of Legislative and Executive Branch officials and candidates for Federal office; and it improved public access to information disclosure under the LDA. HLOGA made reporting more frequent and the reports easier for the public to search, but it did not require more detailed information about the specific members of Congress, staff or Federal agency officials who were lobbied on particular bills or issues.
The one significant new type of data that now must be disclosed is lobbyist “bundling” activity. Bundling occurs when someone solicits others to contribute to a candidate or committee and then delivers a “bundle” of contributions (either physically or virtually) to the campaign. Bundlers get credit for their efforts on behalf of the campaign. Representative Christopher van Hollen (D-MD), one of the co-sponsors of the legislation, explained that the basis for the bundling disclosure provision was to guard against the use of campaign finance bundling by a lobbyist to enhance the lobbyist’s stature and thereby “exert an undue influence over public policy.”
HLOGA also strengthened other lobbying rules imposed earlier by Congress. In 1989, the House and Senate had imposed an “anti-revolving door” provision barring members and their staff from working as lobbyists for one year after leaving office. HLOGA extended that provision for Senators to two years (leading Senate Minority Leader and soon-to-be-lobbyist Trent Lott to resign from the Senate early to avoid the new provision). Similarly, though earlier Congressional rules had limited gifts to members of Congress and their staffers, HLOGA (with limited exceptions) banned outright gifts from lobbyists to members of Congress and staffers and limited the meals and travel that members of Congress could accept from anyone.
While it is too early to tell the effect of HLOGA on the amount and extent of lobbying activity, one early result suggesting that HLOGA has some bite is a sharp increase in the number of former lobbyists who have “deregistered” so as to avoid its new requirements. This suggests that much lobbying activity may be shifting to individuals who need not register as lobbyists as they are defined under HLOGA. Such an unfortunate result was far from the aim of the legislation. Its attempt to regulate lobbying further may have the unintended consequence of deregulating much lobbying. On the other hand, the gift ban and related ethics rules appear to have made it harder for future Abramoffs to curry favor with members of Congress through lavish trips and gifts.
Following the 2008 presidential election, President Obama imposed new requirements on lobbyists through Executive Orders, memoranda and other devices. One of the Obama Administration’s earliest lobbying-related initiatives, announced as an effort to avoid “improper influence or pressure” from lobbyists, prohibited lobbyists from communicating orally with anyone in the Administration regarding the economic stimulus package. The American Civil Liberties Union, the Citizens for Responsibility and Ethics in Washington and the American League of Lobbyists wrote a joint letter in March 2009 criticizing limitations that applied only to registered lobbyists but not to non-registered lobbyists such as corporate directors. As a result, the Administration in July 2009 changed some aspects of this directive, applying it beyond registered lobbyists but narrowing the time frame to which it applied.
The President also announced that, absent a waiver, lobbyists could not serve as presidential appointees, nor could they be appointed to Federal advisory panels. Waivers allowed a former Raytheon lobbyist to become Deputy Secretary of Defense, as well as a former lobbyist for Goldman Sachs to become Chief of Staff for the Secretary of the Treasury. When these waivers attracted criticism, the Administration resolved to grant fewer of them, even for those who had lobbied for reform on behalf of nonprofit organizations.
In October 2009, 16 chairs of the Industry Trade Advisory Committees wrote a letter to the Secretary of Commerce and the U.S. Trade Representative expressing concern over the policy of prohibiting federally registered lobbyists from serving on Federal advisory committees. A November 2009 memorandum defended the Obama Administration’s rules, stating that the concern prompting the approach was “not about a few corrupt lobbyists or specific abuses by the profession, but rather concerns the system as a whole”, because “[f]or too long lobbyists and those who can afford their services have held disproportionate influence over national policy making.” The policies were geared to “level the playing field” so that all Americans, “and not just those with access to money or power”, could gain Washington’s ear. In November 2010 the Office of Management and Budget proposed implementing guidance and requested comments regarding the Obama Administration’s new policy barring certain lobbyist appointees.
Have the new lobbying restrictions worked as intended? A December 2009 Congressional Research Service study concluded that the Obama Administration’s restrictions had “already changed the relationship between lobbying and covered Executive Branch officials.” Whether it has done so in a significant and lasting manner remains to be seen; so far nothing seems to have changed the general power of lobbyists to influence legislation in Congress.Enter the Courts?
Our national experience over the past century has shown us that eliminating tax deductions or requiring disclosure does little to curb the ability of wealthy and well-organized special interests to lobby the Legislative or Executive Branches. With every effort to restrict its power, lobbying has become more professionalized and sophisticated, particularly so over the past 25 years. Lobbying firms, which gain influence and prestige by hiring former members of Congress and former Hill staff through salaries that can start at triple a former government salary and sometimes reach in the millions, compete for the enormous and growing sums of lobbying dollars.
In response to such developments, recent efforts to rein in lobbying have turned to provisions that more directly limit interaction between lobbyists and government officials. Yet critics of President Obama’s policies have become more vocal in raising First Amendment concerns, suggesting that they encroach on individuals’ rights to petition the government. The courts now seem more receptive to such voices, prompted by new Supreme Court thinking about the role of money and politics in the Citizens United decision.
Citizens United, beyond approving unlimited independent spending by corporations and unions in election campaigns, includes language that endangers all lobbying regulation going beyond tax and disclosure rules. The Supreme Court thus endorsed a stingy definition of corruption, one that excludes the sale of access and ingratiation, which could be used to justify regulations covering some lobbying practices. It further held that many limits on political activities are subject to the most searching standard of judicial review, strict scrutiny.
Two recent lower court cases have already relied on Citizens United to strike down state lobbying restrictions. In Green Party of Connecticut v. Garfield, the United States Court of Appeal for the Second Circuit in July 2010 struck down two provisions of Connecticut law related to lobbyists. First, the court struck down as a First Amendment violation a ban, imposed on state-registered lobbyists and their families, on campaign contributions to state elected officials. Relying on Citizens United and its narrow definition of corruption, the court rejected evidence suggesting that the public “generally distrust lobbyists and the ‘special attention’ they are believed to receive from elected officials.” Further, “[i]nfluence and access . . . are not sinister in nature.” The court concluded that a limit, rather than ban, on lobbyist contributions would “adequately address” anticorruption concerns. The court similarly rejected a law banning lobbyists from collecting campaign contributions for elected officials. Again relying on Citizens United, the court rejected the idea that “an individual might secure a political favor by recommending that another person make a campaign contribution.”
In Brinkman v. Budish, a Federal district court in February 2010 struck down on First Amendment grounds a law barring former members of the Ohio state assembly and their staff from lobbying the state assembly. Relying on Citizens United and applying strict scrutiny, the court held that, as applied to lobbying for compensation, the anti-revolving door statute could potentially be justified on anticorruption grounds. The state, however, had failed to present sufficient evidence to demonstrate the basis for a 12-month limitation. Moreover, the statute was too broad in covering matters regardless of whether the former official or staff member has personally participated in formulating policy on this issue and where they had an opportunity to gain “inside” information. Further, the law was declared underinclusive in not restricting “other behaviors and activities that might give rise to actual or perceived corruption, such as the acceptance of gifts or offers for employment unrelated to lobbying.”
These two cases show the difficulty of relying upon the traditional anticorruption interest to justify lobbying regulations that go beyond disclosure or special tax treatment for lobbying. To be sure, not all courts would follow Green Party and Brinkman. Certainly there are ways courts could write reasonable opinions upholding various lobbying regulations on anticorruption grounds. In addition, the Second Circuit in Green Party suggested that more narrowly tailored bundling laws possibly could pass muster, and that laws passed with additional evidence of actual corruption facilitated by lobbyists could justify laws banning lobbyist contributions. But these first two post-Citizens United cases should be viewed like canaries in a coal mine, signaling that lobbying laws that were once seen as easily passing constitutional muster now face a difficult path.
Over the past hundred years, attempts to limit lobbying through tax limitations and disclosure provisions have proved inadequate. Recent efforts focused on limiting interactions between government officials and lobbyists may work better, but after Citizens United they may not survive judicial scrutiny. We need to come up with new arguments for regulating lobbyists—arguments that this Supreme Court will accept in spite of its expansive view of the First Amendment. If they don’t, moneyed interests will have increased power not just over who gets elected, but what they do in office. If that scenario comes to pass, Madison’s smaller factions will have carried the day.