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STEVE INSKEEP, HOST:

When people voted yesterday in places like New Jersey or Virginia or New York, they likely mostly were thinking about state or local issues. But sometimes when there's a state or local election, the issues have already been framed for voters by national groups pursuing their own agendas, and spending millions of dollars to do so using secret donations.

NPR's Power, Money and Influence correspondent Peter Overby has been helping us to trace the spending of such national groups, spending they are not so eager to disclose. Hi, Peter.

PETER OVERBY, BYLINE: Hello.

INSKEEP: OK. You've been investigating this. You told us yesterday about an election in Michigan.

OVERBY: That's right, Steve. A Supreme Court justice in Michigan lost his seat - this was back in 2010.

INSKEEP: Right.

OVERBY: He had been attacked by a social welfare group, a tax-exempt organization which was funded by other social welfare groups.

INSKEEP: And these are social welfare groups that get a tax exemption because they're promising to work for social welfare, but you're say - they're being involved in politics, here.

OVERBY: Right. They've really become a vehicle of choice for big political cash. I've been working with the Center for Responsive Politics on this. It's a nonprofit research organization that tracks political money. And what we saw is that eight years ago, their spending in federal campaigns was a bit more than $3 million. For the last election cycle, it was $256 million. That's an increase of close to 8,000 percent.

INSKEEP: Eight thousand percent. For every one dollar these groups were spending in the past, they're now spending $80. Why would the spending be growing so quickly?

OVERBY: Well, it used to be that donors with deep pockets would give to the national party committees. They'd write checks of 50- or $100,000 at a time. But Congress shut that down as a loophole in the contribution limits. So you know that phenomenon in political spending called the hydraulic effect?

INSKEEP: It's like a balloon, right? I mean, if you push in one area, it expands in another area.

OVERBY: Right. And that place is social welfare organizations, or 501(c)(4)s, as they're known in the tax code. We used IRS records to track the flow of cash through social welfare groups, and this is the big thing we saw: Some of the social welfare groups do nothing but raise money to fund the other ones. We'd find one group, and then another one behind it, and then maybe a third one behind that. It's generally accepted as legal, and all of it is invisible to voters.

INSKEEP: So you're saying that it's a web of groups like this that were behind that race you told us about yesterday in Michigan?

OVERBY: That's right. And this morning, we're going to look at one of those groups. It's based in the Washington, D.C. suburbs, and it's called the Wellspring Committee.

ANN CORKERY: We're blessed to know them and to present them with this honor. And may I ask the Governor and Mrs. Romney to come forth.

OVERBY: That's conservative activist Ann Corkery, the president of Wellspring. She was giving the Romneys a medal from the conservative Beckett Fund for Religious Liberty, where she's on the board. She's also a lawyer specializing in running reputation campaigns. Corkery wouldn't talk to us, so I went to see Wellspring's lawyer, Cleta Mitchell, one of Washington's top campaign finance attorneys.

CLETA MITCHELL: This sudden angst about 501(c)(4)s is startling to me.

OVERBY: Mitchell wouldn't say much more about Wellspring. We do know that its spending spikes in election years; that in 2010, it had financial ties to more than two dozen other groups; that it sent money to groups working judicial elections in five different states. Mitchell says there's nothing surreptitious about any of this. She says it works almost like an investment fund, shepherding a donor's money into selected, other social welfare groups. She says big donors can be smart in business...

MITCHELL: And yet things they would never, ever do in business, they'll do in politics.

OVERBY: So groups like Wellspring are there to help. All of this money being raised and transferred behind a curtain of nondisclosure - this is the crux of what makes social welfare groups controversial.

DONALD TOBIN: It reminds me more of tax shelter transactions.

OVERBY: This is Donald Tobin, a law professor at Ohio State University. He specializes in tax law and campaign finance.

TOBIN: One of the interesting things for Wellspring is on all of their filings, they claim that they're not intervening in a political campaign. But then they give to huge numbers of organizations who do engage in political campaigns.

OVERBY: To which Mitchell responds, these are not political committees.

MITCHELL: What's bad about this?

OVERBY: And the IRS agrees. Most social welfare groups are civic-minded, like the local volunteer fire department or the League of Women Voters. But a social welfare group can commit up to half of its resources on political intervention. And giving money to a second social welfare group can still count as social welfare for the donor group, even if the second group spends the money on politics. Tobin sees that as a loophole, and says it raises questions about the IRS' law enforcement.

TOBIN: We have an agency that doesn't have the resources to enforce, and doesn't have the will to enforce.

OVERBY: The IRS has been hit with budget cuts and with partisan attacks. Just this spring, congressional Republicans - like Wyoming's Cynthia Lummis - accused it of hounding conservatives who applied for social welfare status.

REP. CYNTHIA LUMMIS: This is far worse than anything we've seen in Watergate...

OVERBY: Now the IRS has new management, and it says it's working to clarify the rules. We asked the IRS for comment, and got no response. So we called Marcus Owens. He ran the IRS division on exempt organizations throughout the 1990s. He says the agency might start challenging the claims of social welfare groups or, under pressure, it might turn more passive.

MARCUS OWENS: Something that looks more than just processing the paper, rather than examining what is on the paper.

OVERBY: For now, Washington sees social welfare groups less as a problem than as a terrific way to raise money across the political spectrum. Cleta Mitchell, the campaign finance lawyer, says that's fine. If someone wants to make political donations...

MITCHELL: That is not the government's business. If people want to spend the money, and they want to get together with their friends and spend the money, let them do it.

OVERBY: And, she says, let them do it privately. She says conservative donors risk harassment by liberal activists when their names are disclosed, violating their free-speech rights. So far, conservatives have predominated in social welfare politics. In the 2012 campaigns, 20 groups on the right ran up a million dollars or more in disclosed spending, compared to seven groups on the left. But liberals are working to catch up.

As for Wellspring, Mitchell says it's just a social welfare group that educates Americans about the importance of free-market principals. But Donald Tobin, the law professor, says it's politicking under another name. He says social welfare groups are acting like secretly funded political committees.

TOBIN: Contrary to - certainly - congressional intent but also, in my view, contrary to what's good for a health democracy.

OVERBY: So what we found is a system that seems to aggravate everyone involved in it. Yesterday, we heard from a Michigan Supreme Court justice who lost his election bid, and from the consultant whose social welfare group helped to beat him - people on opposite sides, both of them jaundiced about the system. First, the conservative consultant, Dan Pero.

DAN PERO: I don't like what I see today in politics, but it is what it is. I wish I could go back to when I was growing up. We only had three TV stations. And you can't put the genie back in the bottle on that, either.

OVERBY: And the target of Pero's ad: liberal former justice Alton Davis.

ALTON DAVIS: The old labels don't mean anything. Republican doesn't mean anything. Democrat doesn't mean anything. It's the huge money and everybody else. But that's the deal now, I think, going forward - up and down the road.

OVERBY: Next stop on this road is the 2014 midterm elections. The impact of social welfare groups continues to increase, and so does the volume of political cash coming from donors the public will never know.

Peter Overby, NPR News.

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