Congress Should Expand Free Speech Rules for Tax-Exempt Groups

Political censorship rules for nonprofits are complex, incoherent, and longstanding, due in large part to their placement in the tax law. Recently, House Republicans raised questions about how tax-exempt groups may be engaging in political activities, suggesting a broader probe and a potential move to lift a restriction that bars the IRS from offering guidance on certain nonprofit political activity.

Congress should seize this moment to recognize the important work that charities and social welfare organizations do for the public interest and loosen the free speech restrictions on them—not impose new ones.

As background, political campaign intervention is prohibited for charities described in Section 501(c)(3), although they may engage in certain types of political advocacy such as nonpartisan voter registration. This prohibition, known as the Johnson Amendment, is named for Lyndon Johnson who pushed its passage as US senator in 1954.

Meanwhile, the political speech is permitted by social welfare organizations described in Section 501(c)(4) is automatically considered unrelated to accomplishing a social welfare purpose, regardless of its content. This means that 501(c)(4)s may conduct some as-yet-undetermined amount of political activity as long as they continue to operate “primarily” for social welfare purposes.

The penalty for saying too much about politics is severe: loss of tax-exempt status—spelling the end for nonprofits. It’s a sanction normally reserved for the most egregious violations of tax law such as theft, fraud, or otherwise failing to operate for exempt purposes.

Inherently Controversial

The most common argument for allowing political censorship of nonprofits is that nonprofits receive tax benefits, and taxpayers shouldn’t subsidize speech they don’t necessarily agree with. Tax benefits are a matter of legislative grace—Congress giveth, so Congress may taketh away.

The problem with that argument is that it proves too much because every taxpayer receives a subsidy of some sort when calculating income tax liability, whether it be an exclusion, deduction, credit, or other tax benefit. Surely a tax law requiring those who claim the earned income tax credit to remain silent about politics would be unconstitutional. There would be nothing left of the First Amendment if the tax subsidy theory were correct.

Paternalists believe it’s good for charities to stay out of politics because it protects them from controversy. This argument is both wrong and disrespectful to charities because it contradicts the legislative framework, culture, and history of the nonprofit sector.

Charities and social welfare organizations are inherently controversial. What distinguishes nonprofits from proprietary organizations is that nonprofits operate to achieve a mission rather than to distribute profits to shareholders.

A mission is a theory of change about how to make the world a better place; it’s impossible to change the world without also challenging the status quo. And so political censorship of nonprofits amounts to the misguided advice of a worried parent: Change the world, but not too much, not too fast, and not too political.

Economist Mancur Olson observed that beneficiaries of special interest legislation have an incentive to band together to wield political influence for their own economic interest—to the detriment of everyone else. Under this view, taxing the political speech of such organizations protects the public interest from excessive concentrations of self-interested power by making such speech more expensive and therefore less common.

Olson’s argument is compelling when applied to nonprofits such as labor unions and trade associations, whose purpose is to benefit their members. But its logic runs backwards when applied to charities and social welfare organizations.

Because their missions are to benefit public, and not private, interests to any direct or substantial degree, charities and social welfare organizations should be encouraged to speak up. Everything they do—including what they have to say about politics—benefits the public interest, so subsidizing their speech and other activities makes a good deal of sense. Charities and social welfare organizations should be encouraged to speak about politics as a means of countering the speech of the self-interested.

Avoiding Censorship

The IRS either recognizes the futility of enforcing political speech rules against nonprofits, or it simply has learned not to poke the bear. The cost to the IRS of the so-called Tea Party scandal was tens of billions of dollars in lost appropriations, a greatly diminished workforce, and a sullied reputation. But even before that, the IRS has long declined to deploy its agents in church pews to prevent preachers from endorsing political candidates in their Sunday sermons.

And, really, why should they? What would be gained from revoking the tax-exempt status of charities and social welfare organizations that sincerely believe their political activity is in the public interest and furthers their mission? Churches know they’ll never lose their tax-exempt status from politicking, and they routinely defy the rules as an act of civil disobedience.

Congress and the IRS should steer clear of censoring nonprofit political speech. The 1950s, when Lyndon Johnson targeted nonprofits through his amendment, was a long time ago. It was a time when the Cold War was raging, the Civil Rights movement was dismantling the segregated South, and the free speech movement divided baby boomers culturally from their parents. But all through that decade, and in the decades that followed, nonprofits were pushing boundaries, challenging the status quo, and fueling change.

They paid the price for it, especially private foundations, which Congress punished in 1969 by further restricting their political and lobbying powers, imposing a payout requirement, and limiting their discretion on grantmaking, among other constraints.

The world needs more charity, not less. Censorship isn’t the answer. Our nation was founded on the idea that everyone has a different opinion on what’s best for society, and we can agree to disagree without censoring each other. Our diverse and vibrant civil society is a testament to this noble vision.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alexander L. Reid is a partner at BakerHostetler and its national leader of the tax exempt and charitable giving teams. He is also chair of the American Bar Association’s tax exempt organizations committee.

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