Candidates for public office in the United States typically rely on four sources for campaign funds: (1) individual citizens who make direct contributions; (2) their own political parties; (3) interest groups, often through political action committees (PACs); and (4) their personal and family resources. A fifth source — public funds — has also been available in some elections, most notably presidential elections, since the 1970s.

Growing reliance on the broadcast media and the professionalization of politics have led to increasingly costly election campaigns. Candidates for the presidency spent $607 million in the 2000 presidential election, while candidates for Congress spent just over $1 billion. The average winning candidate for the U.S. Senate spent $7.4 million that year, and the average winning candidate for the U.S. House of Representatives, $849,000. Spending by candidates, however, increasingly constitutes less and less of total expenditures to influence elections, as parties and interest groups play a greater role in direct voter communication.

Traditionally, political parties and interest groups focused their resources on monetary contributions to candidates, who spent money on voter contact, both to persuade voters through advertisements, mailings, etc. and to ensure that voters get to the polls to cast their ballots. In contemporary elections, political parties and interest groups both contribute to favored candidates and spend money more directly to maximize their own influence on the election outcome. This phenomenon makes it harder to monitor the flow of money in elections, and it has presented policy-makers with particular challenges in seeking to regulate money outside the direct control of candidates.

Critics have long asserted that high spending in U.S. elections, combined with the reliance for funds on private sources, raises concerns about possible undue influence over public policy by wealthy donors and interests. Proposed solutions generally involve greater government regulation of money in politics, beginning with improved transparency to facilitate public awareness of election financing and to thus inhibit "special interests" from obstructing the perceived "public interest." "Reformers" have been opposed by those who see election spending as proportionate with both the costs of goods and services in today's economy and the size of government budgets. These observers see election spending as the price a democracy pays for electoral competition, with large contributions and expenditures by interest groups as the contemporary expression of America's long-standing pluralism. The judicial branch of government often raises another issue involved in regulating campaign funding — whether restrictions on campaign giving and spending unduly limit donors' constitutionally protected right to free speech in the political arena.

It might be said that the current U.S. system of campaign financing blends the philosophies of reformers, defenders of the existing system, and the judicial rulings that have set parameters on government regulation. It reflects both the laws that have been enacted — and upheld — and the way in which American politics has evolved.

Differences In Democracies' Political Systems

Comparisons of the American system of election financing with those of other democracies can help us understand some unique aspects of the U.S. political system.

Candidate-Centered Elections. First and foremost is America's departure from the parliamentary system used in most democracies, which places political parties at the center of the process of electing and then running the government. While parties play an important role in American elections, they are far less important than earlier in history, before the many reforms and other changes that occurred during the 20th century.

The United States has, for better or worse, a candidate-centered, rather than party-centered, electoral system. Candidates tend to be independent agents who do not owe their careers or nominations to party officials, but rather to primary election voters. While this independence has had certain salutary effects in terms of greater openness and accountability, it has undoubtedly added to election costs, as candidates need quasi-independent campaign machinery and funding sources. Likewise, many contemporary voters pride themselves on being independent of party labels, voting "for the person, not the party," and thus placing a further burden on the candidate to communicate effectively as a public figure.

First Amendment. Another unique aspect of the U.S. system is the strong role in political processes of the well-defined rights of free speech and association guaranteed under the First Amendment to the U.S. Constitution. It is the judiciary's role to decide whether enacted statutes are in conflict with those rights. In its landmark 1976 ruling — Buckley v. Valeo — the U.S. Supreme Court overturned limitations on amounts that campaigns, political parties, and interest groups could spend to communicate with voters, while permitting restrictions on sources of funds to entities involved in elections. The Court declared that limitations on expenditures to communicate with voters constituted an impermissible restriction on free speech. While the Court recognized that limits on sources (i.e., contributions) also involved curtailment of free speech, it held that reasonable limits could be justified by government's need to protect the system from real or apparent corruption arising from quid pro quo relationships between campaign donors and candidates. By equating the right to spend money with the right of free speech, and by differentiating between money given to a candidate and money spent by a candidate, this and subsequent lower court rulings have had a profound effect on the regulation and flow of money in U.S. politics.

Government Support for Politics. Other democracies' far greater use of the public treasury in financing elections marks another way in which the U.S. political system is different. Government subsidies to parties are common in the international arena, and free broadcasting privileges are often facilitated by government ownership of major broadcast stations, unlike in the United States. The combined effect of direct subsidies and free broadcast time is reduced pressure on politicians to raise campaign money.

Some Americans have long favored similar government subsidies for election campaigns, as well as having free or reduced-rate broadcast time mandated of private sector broadcasters. And they have had some success in getting their ideas enacted. These policies, however, have met with resistance on philosophical grounds (that is, requiring taxpayers to support candidates whom they may oppose) and on practical grounds (such as how to devise a completely fair system of subsidizing campaigns).

Those who support public funding for candidates succeeded in the 1970s in enacting such a system for presidential elections and for some state and local elections as well, but not for elections of members of the U.S. Congress. Since 1976, major-party presidential nominees have automatically qualified for a substantial general election subsidy (some $67 million each in 2000 for Republican George W. Bush and Democrat Al Gore). Parties receive subsidies for their nominating conventions, and, in primary elections, government funds are available to match small individual donations to candidates.

In exchange for receiving funding, candidates must agree to limits on campaign spending, which the Supreme Court permitted because of their voluntary nature. The effectiveness of these limits, however, has been eroded by the ability of interested individuals and groups to spend money to
assist candidates in ways that are legal but are beyond the levels envisioned by federal law ("soft money," as discussed below).

Major Principles of Federal Law

Since the 1970s, three major principles have governed federal campaign finance law in the United States, applying to all elections for president and the Congress. (Each of the 50 states has its own rules for state and local elections.) These principles are as follows.

Public Disclosure of Financial Activity. Public visibility of money in elections, facilitating scrutiny by opposing parties and candidates and by the media, is seen as the greatest deterrent to corruption that might arise from campaign contributions and expenditures. About this aspect of government regulation, there is largely a consensus, at least in principle. At the federal level, this involves periodic reports, with aggregate totals and detailed breakdowns for amounts above $200.

Prohibitions on Sources of Funds. Corporations, national banks, and labor unions have long been prohibited from using funds from their treasuries — corporate profits and union-dues money — to influence federal elections (although many states allow such sources in their elections). These entities may, however, set up political action committees to raise voluntary donations from executives and stockholders and union members, respectively. These funds may be used in federal elections, thus bringing the sponsoring corporation's or union's influence to bear. Also prohibited in all U.S. elections are campaign funds from foreign nationals.

Limitations on Sources of Funds. Federal law limits the amounts contributed to candidates, parties, and groups involved in federal elections, whether by individuals, PACs, or parties. An individual may give $2,000 to a candidate in an election and a total of $95,000 to all candidates, parties, and PACs in a two-year election cycle. A PAC can give $5,000 per election to a candidate, but there is no aggregate limit on all such contributions from a single entity.

The Impetus for Campaign Finance Reform

The issues raised by money and politics have made campaign finance reform a perennial topic of debate in the United States. Throughout the 1980s and 1990s, reform advocates sought unsuccessfully to augment the regulatory regime enacted in the 1970s so as to reduce the role and importance of money in the political system.

The law that was finally passed in 2002, however, bore little resemblance to its precursors. Whereas those measures sought to improve the existing federal regulatory system, the goal of the Bipartisan Campaign Reform Act of 2002, or BCRA (familiarly known as McCain-Feingold for the two lead senators who sponsored the law), is to save that system, by bringing under federal regulation activities that proponents saw as circumventing federal campaign finance law.

Beginning in the 1980s, national political parties began to raise money in amounts far beyond what technically was permitted under federal law, although ostensibly not for use in federal elections per se. This return of the "fat cat" — the powerful, wealthy contributor presumably reined in under the 1970s reforms — heralded the rise of "soft money" in American elections. The term describes funds that are raised and spent outside the federal election regulatory framework but that may have at least an indirect impact on federal elections (in contrast to "hard money," which is raised and spent according to federal election law).

Typically, these soft-money donations, in amounts and from sources prohibited in federal elections, were distributed to affiliated state parties for use in grassroots operations and voter mobilization efforts. By bolstering such activities, they inevitably assisted federal candidates as well as the state and local races at which they purportedly were aimed. In addition, the concerted fund-raising efforts by national party officials and by federal candidates and officials suggested that these donations were sought primarily to assist federal candidates.

Only during the 1996 national elections, however, did the belief that the regulatory system was breaking down become pervasive. Not only was $900 million in soft money raised by the political parties that year, but interest groups and political parties discovered another way to influence federal elections outside of federal restrictions: election-related issue advocacy. This form of soft money involves communications that discuss candidates in conjunction with particular issue positions, but without explicitly urging the defeat or election of clearly identified candidates.

Because most lower courts have interpreted the Buckley v. Valeo ruling as requiring such explicit wording in order to subject communications to government regulation, groups could present public information that encouraged positive or negative views of public officials who also happened to be candidates in forthcoming elections, without being subject to federal election law restrictions. For 1996 and subsequent elections, it was estimated that tens of millions of dollars were spent in this manner, with accurate levels impossible to determine because little or no disclosure was required.

The Impact of McCain-Feingold

After 1996, reformers shifted their focus from limits on PACs and campaign spending and on public financing to closing loopholes they perceived as rendering federal regulation of money in politics increasingly meaningless. The McCain-Feingold law of 2002 generally bans national parties and federal candidates or officials from raising and spending soft money; likewise, it bans state and local parties from spending soft money on what are defined as "federal election activities." With regard to issue advocacy, the new law requires disclosure of all political advertisements referring to clearly identified federal candidates broadcast within 30 days of a primary or 60 days of a general election, and it prohibits sponsorship with union or corporate treasury funds.

Throughout the years of debate preceding passage of McCain-Feingold, the question of constitutionality hung over the discussions. This was perhaps inevitable given the experience of the 1976 Buckley v. Valeo ruling, which left in its wake a system not envisioned by Congress but with far-reaching implications for the flow of money in federal elections. The closer the legislation came to enactment, the more the question of constitutionality became the focus of the debate. With campaigning for the 2004 elections already under way and politicians seeking to adapt to the new law, the political community eagerly awaits the expedited judicial review mandated by McCain-Feingold.

On May 2, 2003, the first of these rulings came when the U.S. District Court for the District of
Columbia, in McConnell v. FEC, struck down the blanket prohibition on soft-money raising by national parties and its use by state and local parties, but retained the bans on public communications that may more directly affect federal elections and on soft-money raising by federal candidates and officials. In addition, the court struck down the regulation of all broadcast ads referring to federal candidates, based on time period, but surprised observers by allowing regulation based on the more subjective standard of whether an advertisement supported or opposed a federal candidate, regardless of when it was disseminated. This ruling was later stayed, to minimize confusion for those already campaigning for the 2004 elections, pending a final decision by the Supreme Court, which will hear oral arguments in September.

Will the Supreme Court follow its general pattern since the Buckley v. Valeo decision and reject the
new law's extension of regulation in the free speech arena? Or will it be persuaded by voluminous evidence and years of experience with the former law that the dangers of corruption and excessive influence by wealthy individuals and groups may warrant greater regulation than it might otherwise prefer? What is clear is that the forthcoming Supreme Court ruling will have a profound effect on future efforts to regulate the flow of money in politics.

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Joseph E. Cantor is a specialist in American national government at the Congressional Research Service, a department of the Library of Congress. He began his career there in 1973 after completing his Bachelor's Degree from the Johns Hopkins University. He has specialized in campaign finance since 1979, in which capacity he has helped to inform Congress about this subject and to analyze the issues involved and the proposals for changes in relevant law.