Working Indiana - Working for Democracy and Justice

An article by Niki Kelly appearing in the Fort Wayne Journal Gazette exposed a bipartisan problem deeply rooted in Indiana election law[March 20, 2008] Kelly reported that Governor Daniels received $608,000 in donations from LLC’s. One of his rivals for governor accepted another $250,000. Indiana limits campaign contributions from corporations or labor unions to no more than $5000 apportioned among all candidates for state office. Political Action Committees (PACs) and individuals generally may donate until it hurts.  There are no statutory limits.  So, why are LLCs treated like people and PACs?  The answer: no principled reason.  The LLC loophole is big enough to drive truckloads of influence through and should be plugged.

The Limited Liability Company (sometimes referred to as the Limited Liability Corporation) is a recent legal invention.  It combines some of the convenience features of a partnership with those of a corporation and, in some cases, garners favorable tax treatment, all of which add up to sound business reasons and account for the recent popularity of the LLC as a way of doing business.  Indiana’s failure to impose contribution limits on LLCs, though, completely eviscerates what voters rightly believe to be sound restrictions on campaign contributions imposed by Indiana statutory law.  Here’s why: as some state’s election commissions have noted, LLCs pose a problem, if unregulated, because their “members” can be individuals, partnerships, or corporations.  Most states have taken action to limit corporate contributions just as Indiana has done.  However, if left completely unrestricted, corporations are free to increase their contributions far beyond the limits imposed by Indiana law by forming or joining LLCs.  At least two states, Texas and Tennessee, have refused to yield to the temptation to permit this practice, finding, in effect, that turning a completely blind eye exalts form over substance.  In 2005, the Tennessee Attorney General reasoned that individual campaign contributions, if paid through an LLC as “a conduit” could be attributed to the individual, basing his opinion on similar treatment imposed by Federal rules [then, 11 CFR § 110 (e),(g), now 11 CFR 110.1 et. seq.].  Texas’ Ethics Commission concluded in an Advisory opinion issued December 12, 1997 that LLCs (whether organized in Delaware or Texas) were subject to contribution limits imposed by Texas law on a “quacks like a duck” basis.  If the LLC engaged in the kind of corporate business that prompted regulation of corporations, it would be treated like a corporation and subjected to the limitations on corporate contributions found in Texas law.  Current Federal election law regulates contributions by LLCs depending on their “election” for treatment under the tax code.  If no election is made, the LLC is treated as a partnership.

The Pew Center maintains an ongoing research project, monitoring progress toward true election reform among the states.  Tellingly, Pew grades Indiana a solid “C” respecting the Hoosier state’s efforts to improve campaign disclosure rules. [http://www.pewcenteronthestates.org/states_rankings.aspx?abrv=IN]  While that is up from the “F” we received from Pew in 2005, the score improved on the basis that the state made electronic reporting mandatory and improved the quality of information that must be lodged.  However, it would appear that Indiana’s GPA is profiting from “grade inflation.”

The LLC loophole does grave mischief in two serious ways: first, it removes the legislative caps placed on corporations by permitting corporations to make unlimited donations by becoming “members” in an LLC, a process that takes a minimum of paperwork and minutes, if not seconds, to accomplish and, second, it permits individuals to make donations completely free of the disclosure requirements Pew highlighted as the basis for our improved grades.  Indiana’s political leaders—who outsourced the State’s willingness to raise tolls on its single toll road—won’t have the political courage to exercise control over LLCs through administrative oversight.  Our election commission invites the foxes in to guard the hen house.  The commission is composed solely of representatives hand picked by state party leadership.  Thus, unlike Texas and Tennessee, who were able to instruct LLCs to behave based upon rational interpretation of legal principles, it will be necessary for Hoosier voters to get the job done by insisting on legislation spelling out just how LLCs are to be treated.  The Commission is unlikely to have the moral courage to initiate reforms on its own.

Is a little thing like regulating LLCs important?  Consider what we know of our politicians as a result of the current Federal reforms.  A recent search of Senator Bayh’s filings reveals that the Senator has received $131,250.00 from Goldman Sachs, the brokerage that arranged both the toll road and Lucas (Colts) stadium financing.  There, the decision to issue “auction-rate” securities proved a costly mistake.  Following collapse of the credit markets, interest rates on the original bonds jumped as high as fifteen percent (15%) and the IFA (Indiana Finance Authority) will have to pay millions more in “fees” to refinance.  While financing the very same project twice might please the underwriting community it does nothing for taxpayers except to extend the risk of default.