• How to Start and Grow a Think Tank
• Grassroots Leadership Guide to K-12 Education Reform
  • Prologue
  • Decide What Type of Organization You Want to Become
    • Overview
    • What is an Unincorporated Association?
    • Incorporating Your Think Tank and Filing for Tax-Exempt Status
    • Choices When Direct Action is Necessary
    • Think Tanks, Lobbying, and Section H: Which Way to Turn?
    • Lessons Learned From Left Field
    • Do's and Don'ts for Lobbying Group: Charity Activity in an Election Year
    • Sample Business Plan
  • Building and Maintaining an Effective Board
  • Get Things Up and Running
  • Legal Reference Material
  • Organize Your Staff and Volunteers
  • Examples of Programs and Operational Materials
  • Building Coalitions
  • Getting Your Message Out/Media Relations
  • Talking with Legislators
  • Raising Money
  • History of School Choice
  • Education Reform Research and Resources
  • Resources
• Taking Donors Seriously
• Fundraising Fundamentals

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Think Tanks, Lobbying, and Section H: Which Way to Turn?

Joseph Bast, The Heartland Institute

Section H - What Is It?

There is a debate underway over whether or not think tanks should take the Section H election when filing their annual tax returns. A 501(c)3 organization that does not take the Section H election cannot devote a substantial portion of its resources to lobbying or propaganda. Nobody knows for sure what "substantial" means, but it probably means 10% or more. Alan Dye puts the safe threshold even lower, at 5%, but he's a lawyer, and lawyers tend to be overly cautious.

Electing to be covered by the provisions of Section 501(h) of the Internal Revenue Code permits you to devote up to 20% of your annual budget to lobbying. The formula is: you can devote 20% of the first $500,000 of exempt purpose expenditures to lobbying, 15% of the next $500,000, 10% of the next $500,000, and 5% of anything over $1.5 million, but not to exceed total lobbying expenses of $1 million. You take the Section H election by filling out Form 5768 and then reporting your spending on the organization's annual 990 tax return.

The benefits of Section H are said to be greater legal certainty as well as being able to devote more resources to direct political action. Instead of drawing up short of actually advocating for or opposing a bill, Section H allows you to speak out and even run ads declaring your position. In an age of media saturation, being subtle often doesn't win the debate. Section H lets you come out and say what legislation you support or oppose.

The price you pay for the higher threshold for lobbying under Section H is more difficult to summarize, partly because it is wrapped up in the separate question of whether a 501(c)3 should lobby at all, and partly because it depends on people and conditions that are beyond your control. Taking the Section H election doesn't mean you have to lobby. It only means that you must report the actual and permitted amounts of your lobbying expenditures in your annual 990 tax return, on page 5 of Schedule A.

If you lobby and take Section H, the numbers are there for reporters and your opponents to note and report. They are also there for the IRS and your Secretary of State to use to compare with their own estimates of your spending on lobbying, should they decide to audit you.

If you are currently spending 10% or more of your resources on lobbying, you should take the Section H election. You are violating the law if you don't. If you don't currently lobby, or spend less than 10% on lobbying, I believe you should not take the Section H election. I think lobbying hurts a think tank's reputation, and while taking the Section H election doesn't require that you lobby, it creates the appearance that you are or soon will start to lobby.

Balancing the costs and the benefits

If The Heartland Institute were still a state-based think tank, just focused on Illinois issues, we would probably have taken Section H a long time ago. In Illinois, ideas seem to mean very little to our state elected officials. (Our former governor was convicted earlier this week on all 22 counts of public corruption. He told a reporter, "I have no feeling of guilt." I don't doubt him for a minute.) Political clout in a state like Illinois means a lot. A think tank that doesn't lobby, then, is at a big disadvantage in Illinois.

But you do pay a price. How big that price will be isn't really up to you. I suggest you think about the impact Section H might have on each of your three major constituencies: media, donors, and elected officials.

Media

If I were the head of a liberal think tank and knew my conservative counterpart, the ABC Institute, took the Section H election, I would send a letter to reporters that read as follows:

Dear Editor:

I am writing to alert you to the fact that the ABC Institute is now a lobbying organization. By filing IRS Form 5768, ABC has told the IRS it intends to devote up to 20 percent of its annual budget to lobbying, using a section of the tax law called Section 501(h). This is alarming because nonprofit organizations traditionally do not lobby, and largely for this reason the general public views them as being credible.

The ABC Institute's decision to use Section 501(h) is especially alarming because:

-- Section H allows the ABC Institute to average its lobbying expenditures over four years, so it could devote its entire budget to lobbying this year, without telling anyone it is no longer a nonpartisan research organization;

-- it allows special interest groups to claim get tax deductions for lobbying expenditures which otherwise would not be tax deductible;

-- it allows special interest donors to hide their identities even as other participants in the debate must disclose their involvement and contributions; and

-- it doesn't require the ABC Institute to tell you, a reporter, or anyone else when it is acting as a paid lobbyist and when it is acting as a truly nonpartisan and independent source of information.

In my opinion, the ABC Institute is no longer a reliable source of research and commentary on matters of public policy. I hope you agree.

In the future, if you choose to quote the ABC Institute at all, I urge you to label it a "lobbying organization," not a "nonpartisan" or even a "nonprofit" organization. I think your readers deserve to know that the spokespersons for the ABC Institute may be being paid to take the positions they are advocating.

Sincerely,

Alec Baldwin
Concerned Citizen

Is this rhetoric fair or accurate? Maybe not, but when have our opponents ever been fair or accurate?

I think this rhetoric would be pretty damaging to an organization's reputation with the media. While we all are pretty used to getting beat up by liberal reporters, Section H is, I think, different. Reporters really should be disturbed if there is no way of knowing whether an organization with a fine sounding name is lobbying or educating. If I were a reporter, I'd want to know.

Donors

If you have a policy of not lobbying, your donors are unlikely to ask you to lobby, and you have a solid and convenient excuse for saying no if they do ask. But if you lobby just a little, and take the Section H election, your donors will be encouraged to ask you to lobby more. In fact, we're debating this issue right now because some of your donors are trying to avoid new campaign finance laws limiting how much they can give or forcing them to disclose their gifts. They want to use your organization to launder some of their charitable giving to groups that lobby.

Consider the worst-case scenario. Let's say 20% of your organization's budget this year is $100,000. What if a donor offers to contribute $110,000 to you, with the understanding that you will pass through $100,000 to XYZ Institute to lobby for Social Security reform? XYZ Institute is a good organization and Social Security reform is a good cause, let's say the donor is a member of your Board, and you could sure use the $10,000. By making the gift to you instead of directly to XYZ Institute, the donor gets a tax deduction worth about $25,000 that he wouldn't otherwise get, and the gift won't have to be publicly reported. It would be entirely legal for you to do this.

For those of you who are thinking you would say no, what if the gift was for $150,000 and you got to keep $50,000? How about $200,000 and you get to keep $100,000? Are we just debating the price?

But why stop here? Since Section H allows lobbying expenditures to be averaged over a four-year period, a 501(c)3 organization can legally devote as much as 100 percent of its spending in any given year to lobbying efforts. You could agree to pass through your entire annual receipts this year to XYZ Institute, solely to lobby for Social Security reform, and so long as your four-year average comes out to 20 percent or less, you're legally okay.

Elected Officials

Finally, how do elected officials view 501(c)3 organizations that lobby? In some cases it might lead to the 501(c)3 being viewed as more of a player, as an organization that doesn't just give advice or write op-eds, but actually puts players on the field and can deliver votes or punish politicians who vote wrong on important legislation. That's a good thing, and as I said earlier, in states like Illinois, this may be the only way to be relevant.

In other states, it will lead elected officials to doubt that you are genuinely nonpartisan. Ideas and principles are nonpartisan; legislation rarely is. When you engage in lobbying, you almost invariably side with one political party or the other. So some of what you gain in stature by virtue of being feared, you lose by being viewed as partisan. In some states, and maybe in all states at some time, that might be a trade-off worth making. In others, probably not.

Conclusion

I recommend Section H for organizations already spending more than 10 percent of their budgets on lobbying, and I recommend not taking Section H if you are not already lobbying or don't plan to. If you want to lobby, create or partner with a 501(c)4 and do it by the book.

If you treat your 501(c)3 organization like a convenient tool for achieving short-term political objectives, don't be surprised when the media, legislators, and your own donors start treating it the same way. You may win some short-term political victories, but you will have surrendered any claim to being able to speak with authority about the long-term best interests of your state.

Joseph Bast is president of The Heartland Institute, a 22-year-old nonprofit organization based in Chicago.