Small-Donor Empowerment

In the wake of the 2014 mid-term election that cost nearly $4 billion, and in which the tide of “dark money” from large, unidentified donors swamped key races, it’s become clear that we need a new approach to money in politics. While campaign finance laws based primarily on limits and restrictions on outside spending have been hampered by recent Supreme Court decisions and by new tactics to evade limits, there is hope, and a strategy that has been explicitly upheld by the current Supreme Court. The best hope for reducing the self-reinforcing cycle of economic and political inequality, and ensuring that the voices of ordinary Americans are heard, rests in reforms that, instead of seeking to limit the channels by which concentrated wealth influences the electoral and legislative process, instead shift the incentives, reducing the influence of large donors by empowering small ones. These models combine relatively modest public funding or tax benefits with technology innovations and other policy changes that encourage small-donor participation.

These approaches encourage candidates to seek contributions from the same kinds of people they seek votes from, they boost the value of a donor base of average people, and they can give middle- and lower-income people a true voice in campaigns and governance. These ideas are not theoretical: About a dozen states and municipalities employ small-donor empowerment systems, in the form of tax credits to the donor, matching funds to the candidate for small contributions, or systems that provide full public financing to candidates who show a base of small donations. Complementary methods to encourage small donors might involve new methods of organizing donors, or technological innovations that make it easier for donors to give, or for candidates to identify potential donors. Some of these ideas are embodied at the federal level in the Government By the People Act, which had 160 cosponsors in the House in the 113th Congress.

These promising but complex ideas pose challenges related to enactment, implementation, candidate participation and public support. Around the U.S., there are success stories for each of these approaches – most of them virtually unknown – but there are also stories of similar initiatives that have not been implemented well or in which few candidates or donors participate. In order to design and enact sound policies at the federal, state and local level, we should look at this entire family of solutions – not just individual models -- in order to understand what works and why, successfully implement these policies, identify and avoid unintended consequences, and encourage participation and public support.

The purpose of this paper is to outline the various options that make up the family of small-donor empowerment systems, name the strengths and weaknesses of each option based on what we currently know, and to identify areas for possible research and experimentation, including hybrid systems. It is intended to be useful to state- and local-level activists and policymakers considering options for their own state, and journalists or others seeking to understand this family of solutions.

The Goals of Small-Donor Empowerment

Small-donor systems aim to offset, rather than eliminate, the influence of concentrated economic interests on the electoral process or elected officials. The general values promoted by small-donor empowerment might vary by circumstances and the problem being addressed, but generally include

• Political equality: Moderate the influence of the very wealthy by strengthening the voice of everyone else.

• Participation: Encourage significant numbers of citizens to engage with democracy by doing more than voting, such as by giving small amounts of money or time.

• Reducing corruption: Elected officials are less likely to be influenced by one or a few small donors than if they are dependent on a few large ones.

• Increasing electoral competition: Lower the barriers to entry for candidates, and sometimes also to third parties or issue-based organizations.

• Making representative institutions more representative: Elect more low- and moderate-income people, women, people of color.

• Help make contribution limits, and voluntary spending limits, effective: By providing an alternative means to raise money, small-donor empowerment would reduce the incentives for candidates or parties to evade contribution limits through outside organizations or Super PACs.

Measuring Success for Small-Donor Empowerment Systems

The remainder of this paper will consider strengths and apparent weaknesses of several strategies for small-donor empowerment. First, let’s be clear about what we should measure in evaluating each strategy, in rough order from criteria that can be quantified with some certainty to those that are more subjective:

• Participation rate by candidates

• Change in number of competitive or contested races

• Change in nature of candidates – e.g., women, minorities, younger candidates

• Participation rate by citizens as donors

• Candidate time: more with voters, less with large donors

• Political support for the program – not just whether it can be enacted, but whether it survives political (and legal) challenges, and the jurisdiction remains committed to improving the system

• Rates of outside spending

• Polarization or legislative gridlock

• Measurable record of different/better governmental results (this is the most difficult and contested thing to measure)

Put simply, a “successful” system would be one in which almost all candidates participate, there’s a measurable change in the types of candidates, a significantly greater number of citizens participate as donors, the system survives challenges, and outside spending is lower than in comparable jurisdictions. Outside of the system itself, one would hope to see increased public confidence in government, a more effective legislature, and evidence that the power of lobbyists and concentrated wealth on the legislative process had been reduced. But it is unlikely that any system will achieve all of these goals, and most of them may take several years, as the system and political culture of the jurisdiction adjusts to the new opportunities.

Small-Donor Empowerment: An Adaptable Family of Solutions

Small-donor empowerment programs can be constructed from solutions that fall into two broad categories: Those that provide funding directly to campaigns and candidates, and those that provide resources to individual citizens which they can direct to their preferred candidates. The four basic components, in existing or proposed systems, include flat grants to candidates who accept spending limits; matching funds that increase the value of small contributions; tax credits for small contributions; and vouchers that provide every citizen with a small fixed sum to contribute to a candidate or a party. In the analyses below, we’ll consider each of the components as a full system, but many of the newest and most promising innovations mix and match components – a flat grant to get a candidate started, for example, combined with matching funds beyond that initial grant.

Matching-fund Systems

The best-known system of public financing that focuses primarily on small donors is New York City’s matching-fund model, which provides a six-to-one public match for contributions of $175 or less, for candidates who agree to spending limits. The system has been continually revised since its launch as a one-to-one match in after a series of scandals in the late 1980s. Seven states have programs that provide matching funds for small contributions for some offices; in many participation is low because the voluntary limits are unrealistically low. The same is true of the federal matching system for presidential candidates in the primaries, which most major candidates have opted out of since the late 1990s, because the limits, especially on spending in each primary state, are too restrictive.

Strengths: New York’s matching fund model performs well by several of the criteria noted above.

• Nearly all candidates participate – 92% of candidates in the 2013 primaries -- with the exceptions of a few self-financed candidates and minor candidates.

• Races appear competitive: 34 of 51 City Council races in 2013 were competitive or contested, many with more than two candidates.

• Black and Latino representation on the Council has increased significantly since the first election held under the program, in 1991.

• The program appears to have broad political support and has been continually improved.

Potential Challenges: The 2013 election raised concerns about whether a matching fund system might be overwhelmed by independent spending, as a total of $16 million was spent by outside groups, principally labor unions and real-estate interests, across the primary and general elections for the three citywide seats and 41 council seats. Still, compared to states such as North Carolina where independent spending dwarfs the candidates’ own spending, this is a relatively modest amount, and as the New York City Campaign Finance Board’s post-election report noted, in all the council races in which outside spending greatly exceeded the candidates’, the candidate supported by outside spending lost. Further, all this spending was genuinely independent, not coordinated by candidates or parties to evade contribution limits, as it is in federal races and some states.

Some political scientists have suggested that programs like New York City’s that directly boost the value of a small contribution might exacerbate ideological polarization, based on evidence that candidates with broad national networks of small donors are often ideological extremists, as well as some comparison of legislatures in states with public financing. New York City provides little evidence of this, but in part because most of the competition is within one party, and often concerns relatively local issues rather than larger ideological fights such as collective bargaining.

Finally, a system such as New York’s creates significant incentives to fraud, which could take the form of “straw donors” – either fake donors, or real people who are reimbursed for their small contributions – in order to entitle the candidate to significant public funds which in turn might be used for personal purposes. New York City’s Campaign Finance Board disqualified former city comptroller John Liu, a mayoral candidate in 2013, for just such abuses. Some have argued that this power to disqualify gives an independent agency too much power over who can run, but a more salient concern is that an administrative agency weaker than the NYC-CFB might overlook such abuses.

Keys to Success: A matching-fund system seems more likely to succeed if the match is greater than two-to-one, the spending limits are high enough that they don’t deter participation, and the program is run by an effective, respected and responsive public agency that also gathers data and recommends improvements to a receptive legislature.

Full-Public Financing/Clean Elections

The “Clean Elections” model enacted in several states between 1998 and 2005 provides full public funding as a fixed sum based on spending in previous elections to candidates who agree to spending limits and to accept no large contributions. Clean Elections is not usually considered a “small-donor empowerment” model, because the original promise was to eliminate private money from politics entirely. But in order to qualify for a fixed grant, candidates are required to demonstrate broad public support in the form of very small contributions. In practice, these qualifying contributions have become an important and visible element of the systems in Arizona, Maine, and Connecticut. Think of them as similar to matching-fund models, except the “match” takes the form of a large, fixed grant.

Strengths: The greatest strength of a Clean Elections system is that, for candidates who participate, it fully eliminates the large private donations that distort public decision-making. Even if not all candidates participate, those who do renounce private money are able to compete equitably with those who rely on traditional sources.

In studies such as Michael Miller’s 2014 book, Subsidizing Democracy, Clean Elections systems have been shown to have increased the amount of time candidates spend with voters, brought a wider range of candidates into competition, and deepened voter engagement in legislative races. Other studies have shown that the donors of qualifying contributions are significantly more diverse than donors in other jurisdictions. While some aspects of Clean Elections systems, such as Arizona’s provision providing additional funds to candidates who were targeted by independent spending, have been invalidated by Courts, the core of these systems have survived both constitutional and political challenges. (Portland, Oregon’s system is a recent exception, repealed by voters in 2013.)

Challenges: Participation in Clean Elections systems varies widely, but is rarely as high as New York City’s matching system, ranging from 25% to 90% in Connecticut. In Arizona in particular, participation is declining as independent spending plays a larger role and candidates worry about committing to a fixed amount. Further, some journalists have argued that by reducing the role of gatekeepers such as the Republican business community in determining who can run, more extreme candidates have gained power, increasing polarization and pushing the state to the far right on issues of immigration and LGBT rights, but this is a deeply contested claim. And while Clean Elections systems are generally politically resilient, there has been no expansion of the model since 2005, when Connecticut adopted it by legislative action.

Outside spending presents even more of a challenge to Clean Elections systems than to matching-fund models. Candidates who expect to face outside spending are more likely to be deterred from participation than in a matching-fund system, where they can keep raising individual contributions, including those not eligible for the match. In other cases, such as Connecticut, elected officials have created other channels for funding through which several million dollars were raised and spent on behalf of the 2014 candidates for governor, even as the candidates also took public funds.

Tax Credits and Refunds

Like the original matching-fund programs, the idea of providing citizens with a tax-credit for small contributions dates to the 1960s and 1970s but there is renewed interest. The most successful program is Minnesota’s, which provides an immediate refund, through the state’s revenue agency, of annual contributions to candidates or a political party of up to $50 per person. Other states’ tax credit opportunities are not well publicized and not as efficient, and participation is low. A federal tax credit for political contributions was in place from Minnesota also couples the tax credit with partial public financing for participating candidates.

Strengths: As research by the Campaign Finance Institute has shown, Minnesota’s tax-credit model shares many of the strengths of New York City’s matching system.

• Participation by candidates is consistently high. Despite a lapse in funding for the program between 2009 and 2014, after the program was relaunched in 2014, 88.5% of candidates agreed to the spending limits and other conditions of participation. Surveys of candidates by CFI found that the system changed their behavior and that the tax credit was important to their small donors.

• CFI has found that donations of $100 or less make up 45% of campaign funding, as opposed to 7% in New York State. Information on 2014 use of the tax refund will be available later in 2015, but for the last full statewide election cycle in which the system was available, 180,000 refunds were issued, about 8% of the 2.2 million who voted.

• The tax-credit model may also be more political saleable than other approaches, as it is less vulnerable to the “welfare for politicians” charge, because the refund goes to individuals. Many conservatives who oppose limits say they would support a tax credit, including a refundable credit, and Wisconsin Rep. Thomas Petri, a now-retired Republican, introduced legislation to relaunch the federal tax credit in 2013. Some polling conducted for represent.us suggests that tax credit model wins more immediate support than a matching-fund system. On the other hand, Minnesota’s tax credit has not been as politically resilient as other state’s programs, as it was defunded by a Republican governor and relaunched only when a Democrat was elected.

• A tax credit can be relatively simple to operate, with less administrative overhead than a matching-fund or Clean Elections model, since funding is disbursed in very small amounts to individuals rather than large amounts to candidates.

Challenges: A tax credit is not a viable policy, at least not by that name, in the nine states that have no broad individual income tax. It would also be complicated to implement in states with no system in place for refundable tax credits – that is, credits that are paid even if they exceed the amount the taxpayer owes in taxes. According to the Tax Policy Center, 15 states have refundable individual income tax credits, mostly state versions of the Earned Income Tax Credit. Note that a tax credit for campaign contributions must be refundable, or it would be available only to wealthier households, exacerbating political inequality. However, a system like Minnesota’s, with an instant refund available by sending in a receipt, can operate independently of the state’s revenue system.

The other challenge for tax credits is publicity. While there have been efforts to publicize the tax credit more broadly, the key messenger is candidates and parties: If they are asking ordinary citizens for small contributions, telling them that the tax credit makes it effectively free, and giving the very simple refund form, it will be more widely used. Blending the tax credit with another form of small-donor public financing, such as a small match or a flat grant, would provides an incentive for candidates to participate in the program and publicize it to citizens.

Vouchers

Often proposed but never fully tested, the idea of a simple voucher of $50 or $100 for every citizen to contribute to a candidate or party – called Patriot Dollars by longtime advocate Bruce Ackerman of Yale Law School -- captures some of the strengths of the other models while addressing some of their challenges. Activists in Seattle are currently developing a proposal that would provide every adult with five $20 vouchers at the beginning of each election year, which they could transfer to one or several candidates.

Strengths: In theory, since even candidates in highly competitive races spend only a few dollars per eligible voter (with exceptions in states like Alaska), broadly utilized vouchers would put enough money into the system that most campaigns could be almost fully funded through these public dollars, all directed by the preferences of citizens. Vouchers would be less vulnerable to the “welfare for politicians” argument directed at other public financing models because the funds would go through citizens, to be donated or not.

If the concern that other small-donor models might fuel ideological polarization (because small donors in the current system appear to hold more extreme positions), a voucher system that enabled everyone to be a small donor – with a use-it-or-lose-it voucher – might pull legislators back toward the position of the median voter. Like tax credits, a voucher system would be relatively simple to implement – citizens would give their vouchers to candidates, who would simply exchange them for funding. As long as the vouchers were secured by a serial number or bar code, issues that can arise in matching-fund systems, such as straw donors, would be no concern.

Challenges: Much like its advantages, the downsides to a voucher system are not yet known. The concept assumes a level of engagement with individual candidates that most citizens don’t possess even at the end of an election cycle, much less earlier on. For vouchers to be used widely, a large cultural change in levels of engagement and participation would be required, but if vouchers could induce that change, by giving everyone more than just a vote as a means of participation, it would be healthy on many levels.

One potential risk is that better-known and well-organized candidates, particularly incumbents, could move in quickly and capture a large share of vouchers before voters became aware of other candidates they might prefer, thus reducing competition rather than increasing it. There is also the risk of fraud, if citizens uninterested in politics might sell a $50 voucher for much less, but like large-scale voter fraud, it would be risky and could be heavily penalized. If vouchers are tested, as they should be, it’s likely that other problems with implementation of such a transformative idea will be discovered.

Other Provisions to Offset Big Donors

Not all aspects of a small-donor empowerment system would fall within the realm of campaign finance regulation. Other changes that would lower the barriers to entry to politics, increase public awareness of political choices, or make elections more competitive could complement changes to the financing system. They include:

• Voter guides and mandatory debates, as a condition of participation. (Participation in debates is required in New York City.)

• Technological intermediaries, such as ActBlue, that will help small donors find candidates they might want to support.

• Technological innovations at the campaign level that would reduce the cost of campaigns, such as the platform of tools, including list management, social media and voter lists provided at low cost by Nationbuilder.

• Electoral fusion – allowing parties to endorse candidates from other parties.

• Enhanced legislative capacity to reduce legislators’ dependence on lobbyists.

• Further restrictions on lobbyists, as in the American Anti-Corruption Act

Two Other Issues to Consider

Parties and other political intermediaries: Most small-donor empowerment programs focus primarily on candidates, and particularly on increasing candidate competition, often in primaries. But tax credits, vouchers, and matching systems could also be structured in ways that allowed citizens to give more to parties or to other legitimate political organizations. (In 2005-2006 in Minnesota, more refundable contributions were made to parties, including local party committees, than to candidates.) Some political scientists argue that moving money through parties reduces the fragmentation and ideological polarization of politics, because parties have long-run reputational interests to protect, and thus gravitate toward the center over time. Less contested the value of organizations, whether parties, issue-based organizations, or community groups, that mediate and mobilize citizens. Vouchers or matching grants could also be made available to some of these organizations, in order to strengthen the civic infrastructure. On the other hand, allowing vouchers or tax credits to run through advocacy groups or their political action committees might exacerbate ideological polarization. But there is a strong case for using public financing to strengthen parties and political intermediaries, as well as candidates.

Disclosure. Campaign reform advocates have often seen disclosure as an indisputable good, always better than nothing, and until recently, full disclosure of all campaign spending seemed to be one area on which there was bipartisan consensus and support in the courts. More recently, however, questions have been raised about the value of disclosure of the names of small donors, and several studies have indicated that small donors are often deterred by the information that their political preferences will be made public. There is also evidence that, especially after Citizens United, employers are more actively directing employees’ political activities. Raising the exemption level for disclosure of small contributions, from the current $200 at the federal level and much smaller amounts in most states, in exchange for more comprehensive disclosure of large contributions or independent expenditures, might be a key component of a small-donor empowerment program.

Some of the systems described above might have complex interactions with a higher disclosure limit. In a tax-credit system, all contributions are disclosed at least to the revenue agency, but there would be no need to make them public. In a matching system, too, qualifying contributions would be disclosed to the administrative agency. But because the agency might not spot all the potential frauds, such as straw-donor schemes, it’s useful to make them public, as New York City does, so that journalists and other researchers can aid in enforcement.

One appealing feature of vouchers is that, in theory, they could actually be wholly anonymous. A citizen could place a voucher in an envelope without a return address and send it to the candidate or party she wished to support. This is the vision that law professors Bruce Ackerman and Ian Ayres described in their 2002 book, Voting with Dollars. In practice, the administering agency might prefer the added security available if each voucher was traceable back to its original holder.

A Caveat – Culture Matters

Before looking at the different models, it is essential to note that a system that seems successful in one state or city might not have the same effect in another, and a system that is popular with voters and legislators in one state might find less support in another. Campaign finance programs don’t have fixed and certain effects. They intersect with a community’s political culture and habits, but in turn, over time, if successful, they will also change those habits. That’s all the more reason to treat these ideas as a menu of options that local advocates and legislators can choose from in order to build a system that seems likely to work for a particular jurisdiction.

Conclusion: What System Is Best?

There’s no obvious answer to the question of which small-donor empowerment system is the one that state- or local-level advocates should pursue. Tax-credits might appear to be the most politically viable approach, but have not been tested in an initiative or legislative fight in recent decades. If the goal is to maximize participation in the system, a generous matching system with reasonable spending limits seems to work well. If the goal is to fully replace larger donations with public funds and small donations, for at least some candidates and elected officials, Clean Elections remains the ideal model and can be modified. Vouchers certainly deserve a test. And any proposal can be modified, hybrids can be constructed, and additional changes made to strengthen the idea. No procedural change on its own will immediately renew the culture of democracy, but small-donor empowerment, as it catches on nationally, will be one significant step forward.