If You Can’t Beat ’Em, Join ’Em? –The Rise of the 501c4 on the Left

November 27, 2018; The Atlantic

As regular NPQ readers know, “social welfare” or 501c4 organizations have been on the rise for the past decade. Traditionally, they were largely associated with conservative causes. For example, in 2011, NPQ’s Rick Cohen noted that a 501c4 backed by Republican campaign strategist Karl Rove aimed to raise $120 million for the 2012 election cycle.

But as David Pozen, a Columbia law professor, explains in the Atlantic, the 501c4 is increasingly used by both left and right. Pozen is hardly the first to notice this. Indeed, at NPQ, we wrote about this trend back in August 2017, calling attention to the presence of 501c4s at such organizations as American Association of Retired Persons, the National Organization for Women, the American Civil Liberties Union (ACLU), the Center for Community Change, and the Sierra Club. In October 2017, we covered the shift of the NAACP from being a 501c3 to 501c4 so that it could engage directly in electoral activity.

These developments should not be surprising. Pozen observes that, “Nonprofit groups that used to focus their energies on litigation and education are increasingly structuring themselves to be political players.” The reason for this is obvious—anyone who seeks to achieve progressive social change through litigation or education today faces exceedingly slim odds.

In Pozen’s view, the “501c3 form fit snugly into the postwar theory of legal liberalism, in which the federal courts were seen as the key agents of social reform and professionally managed nonprofits as their partners in that effort.” Now, Pozen observes, “with Brett Kavanaugh’s recent confirmation, whatever remained of the left’s faith in the Supreme Court as an engine of justice has crumbled.”

It is also the case that a political vacuum had opened because of the retreat of labor unions. Labor unions once were bulwarks of progressive politics. But with the percentage of private sector workers in unions having fallen from over 30 percent at mid-century to 6.5 percent today, labor can no longer reliably achieve electoral success.

Into the breach have run an increasing number of left-leaning 501c4 organizations. In addition to the groups listed above, new 501c4s have emerged with names such as the Indivisible Project, Onward Together, the Bernie Sanders-backed Our Revolution, Sixteen Thirty Fund, Stand Up America, and Women’s March.

As Pozen points out, like 501c3 nonprofits, 501c4 social-welfare organizations are also exempt from federal income tax, but of course donations to them are not deductible. But unlike 501c3s, they can lobby as much as they wish and may engage in partisan political campaigns “as long as that work is not their ‘primary’ purpose or activity.”

Pozen notes that many organizations, such as the ACLU, have both 501c3 and 501c4 arms—but the 501c4 arms currently are growing much faster; at the ACLU, 501c3 assets grew by 17 percent in fiscal 2017, but its 501c4 assets grew 89 percent.

Pozen speculates that the 2017 Republican tax bill may inadvertently encourage more 501c3 organizations to form 501c4 branches—or even switch tax status entirely like the NAACP. Why? The charitable tax deduction becomes less valuable when only a fraction of donors is likely to claim a tax deduction anyway, making “public-charity status…less relevant to fundraising.” Pozen adds that, “The 501c3 golden handcuffs have become a little less golden.”

What does this all portend?  On one hand, spending less time on litigation and increasing the resources directed to mobilization and grassroots organizing is surely a healthy development for anyone who cares about the overall health of US civil society. The reengagement in politics—as seen in the 2018 elections, the highest turnout midterm elections that the US has had since 1914—is surely a positive development.

On the other hand, all of the problems that arise from accepting secret donations and the overall lack of transparency in the sector—those problems still apply, even if the scales of who is raising those secret dollars have now balanced out a bit. We’ve noted at NPQ before how politics these days often comes down to a battle of the billionaires—whether it is the Koch Brothers versus Tom Steyer or this fall’s bizarre San Francisco tête-à-tête between Salesforce CEO Marc Benioff and Twitter CEO Jack Dorsey. In the long term, this can’t be healthy, no matter who “wins.”

Pozen expects that with increasing use of 501c4 organizations on both the right and the left, pressure will rise for Congress to implement greater regulation (such as, perhaps, mandating similar disclosure rules to 501c3 nonprofits). Only time will tell, however, if he is right.—Steve Dubb