Obama vs. Karl Rove? New campaign finance proposal called a power grab.

The Obama administration wants to rein in tax exempt 'social welfare' groups that channel huge amounts of anonymous money into politics. The change would appear to hit Republicans harder.

In moving to clarify Internal Revenue Service tax rules regarding nonprofit groups that are active in politics, the Obama administration has opened a can of controversy over whether, in fact, the move is a power grab for Democrats.

The step could squeeze the practice of wealthy donors anonymously channeling millions of dollars into election-oriented TV ads, but probably not before the 2014 election.

The new guidance, released for public comment before being finalized, aims to define what constitutes “candidate-related political activity” and to distinguish it from the “social welfare” mission of 501(c)(4) organizations. By organizing under this tax-exempt IRS classification, groups such as GOP strategist and fundraiser Karl Rove’s Crossroads GPS were able to spend prodigiously on political ads last year, without having to disclose donor identities.

Now, the Obama administration's move would label campaign advertising, get-out-the-vote drives, and other core election activities as "candidate-related," potentially paving the way for politically oriented 501(c)(4)s being barred from retaining their tax-exempt status.

Critics are framing the step as an attack on conservative groups. Shortly after the Treasury and IRS announced the proposed move on Tuesday, Rep. Darrell Issa (R) of California, who chairs the House Oversight and Government Reform Committee, called it a “crass political effort” to gain an electoral advantage.

Are the critics on solid ground in calling this a political power grab?

They have some evidence on their side. Judging by the flow of campaign ad money in 2012, the new guidance will fall heaviest on Republican-oriented groups. It doesn’t help the optics that the announcement doesn’t cover labor unions – traditional allies for Democrats – and that it comes months after the IRS was mired in scandal over singling out tea party groups for scrutiny over whether they deserved to operate tax-exempt.

At the same time, that scandal suggests that clear rules for determining who should and shouldn’t have tax-exempt status have been lacking. The investigation into IRS practices pushed some agency officials out of their jobs, but also resulted in stepped-up calls for guidance on the issue.

While many Republicans emphasize the idea of campaign ads as “free speech” protected by the Constitution, many on the other side welcomed the move, saying unconstrained floods of money have become a corrosive influence in US politics.

“Enormous abuses have taken place under the current rules, which have allowed groups largely devoted to campaign activities to operate as non-profit groups in order to keep secret the donors funding their campaign activities,” Fred Wertheimer, president of the nonpartisan group Democracy 21, said in a written comment.

He and other political analysts noted that an important second step of the IRS guidance is still to come: a benchmark for how much of the newly defined “candidate-related political activity” a social-welfare organization can engage in without losing its tax-exempt status.

“How this critical issue is resolved will determine whether the new rules will be effective in ending the misuse of the tax laws,” he said. In his view, the level “must be set to comply with the statutory requirement that social welfare groups to be ‘exclusively’ engaged in social welfare activities," not political activities.

Both Democrats and Republicans spent massive amounts of money to win the 2012 presidential election: $1.1 billion by the “blue team” favoring President Obama and $1.2 billion by “red team” favoring Mitt Romney, according to the Center for Responsive Politics, a group that tracks the flow of campaign dollars.

But the Republican effort was far more dependent on “outside” money – that is, donations not made directly to a candidate or political party. That money totaled nearly $419 million for Romney versus $131 million in pro-Obama funds. The sources of outside funds include social welfare groups, like Crossroads GPS, as well as “super political-action committees” – political action committees that operate free from any legal limits on contribution amounts.

Including all 2012 campaigns, not just the presidential race, politically active social welfare groups spent $256 million, according to the Center for Responsive Politics. Liberal groups were far outweighed on the list by conservative ones, such as Crossroads GPS ($71 million), Americans for Prosperity ($36 million), and the American Future Fund ($25 million). 

By that gauge, the proposed IRS rulemaking appears set to hit President Obama’s political rivals hardest.

Sen. Orrin Hatch (R) of Utah, the top Republican on the tax-writing Senate Finance Committee, issued a statement saying that any changes to the rules “should be carefully considered in a fair, equitable and non-partisan manner. Given the IRS' recent track record, I pledge to thoroughly oversee this process to ensure politics aren't brought to bear.”

Senator Hatch noted that a rise in applications for tax-exempt status in the past few years has included politically active unions in the 501(C)(5) category, not just the 501(c)(4) social welfare groups. “I hope the Administration understands that what's good for the goose is good for the gander and looks at these union groups moving forward,” he said.

According to a Bloomberg report, the IRS and Treasury say they’ll ask for comments on whether and how new rules should apply to nonprofit groups, such as unions, that fall under other sections of the tax code.

Although the most major impact of the new rules promises to be on campaign advertising, the guidance would define other activities as “candidate-related political activity” as well, including distributing voter guides that refer to candidates, and staging an event at which a candidate appears (if the event is within 60 days of an election).

Calling voter registration drives “candidate related” could be controversial with political operatives in both parties. The comment period on the rulemaking will last for 90 days.

Whatever the Obama administration’s motives, and whatever form the final rules take, some analysts predict the result will be to rearrange the flows of money into politics, rather than to constrain those flows.

Republicans may be more affected by new limits, but the trend of money supporting both political parties has been upward. When impeded by new campaign finance rules, the money typically just flows through other channels.