Predicting the Impact of Democracy Vouchers: …...Predicting the Impact of Democracy Vouchers:...

Predicting the Impact

of Democracy Vouchers:

Analysis and Questions in Light of South Dakota’s

Successful Initiative

Michael J. Malbin

December 2016

PRACTICAL AND OBJECTIVE. RESEARCH FOR DEMOCRACY.

The Campaign Finance Institute is the nation’s pre-eminent think tank

for objective, non-partisan research on money in politics in U.S.

federal and state elections. CFI’s original work is published in scholarly

journals as well as in forms regularly used by the media and policy

making community. Statements made in its reports do not necessarily

reflect the views of CFI's Trustees or financial supporters.

To see all of CFI’s reports and analysis on money in

politics visit our website at www.CFInst.org

BOARD OF TRUSTEES: Anthony J. Corrado – Chair

F. Christopher Arterton

Betsey Bayless

Vic Fazio

Donald J. Foley

George B. Gould

Kenneth A. Gross

Ruth S. Jones

Michael J. Malbin

Ronald D. Michaelson

Ross Clayton Mulford

Phil Noble

ACADEMIC ADVISORS: Robert G. Boatright

Richard Briffault

Guy-Uriel Charles

Diana Dwyre

Erika Franklin Fowler

Michael Franz

Donald P. Green

Keith Hamm

Marjorie Randon Hershey

David Karpf

Robin Kolodny

Raymond J. La Raja

Thomas E. Mann

Lloyd Hitoshi Mayer

Michael G. Miller

Costas Panagopoulos

Kay Lehman Schlozman

ABOUT THE AUTHOR

Michael J. Malbin, co-founder and Executive Director of the Campaign Finance Institute (CFI),

is also Professor of Political Science at the University at Albany, State University of New York.

Before SUNY he was a reporter for National Journal, a resident fellow at the American

Enterprise Institute and held positions in the House of Representatives and Defense

Department. Concurrent with SUNY, he has been a member of the National Humanities Council,

a visiting professor at Yale University and a guest scholar at The Brookings Institution. His co-

authored books include The Day after Reform: Sobering Campaign Finance Lessons from the

American States (1998); Life after Reform: When the Bipartisan Campaign Reform Act Meets

Politics (2003); The Election after Reform: Money, Politics and the Bipartisan Campaign Reform

Act (2006) and Vital Statistics on Congress.

ACKNOWLEDGMENTS

The Campaign Finance Institute gratefully acknowledges the support of The Democracy Fund,

The William and Flora Hewlett Foundation, Sean Eldridge, The John D. and Catherine T.

MacArthur Foundation, The Mertz Gilmore Foundation, The Rockefeller Brothers Fund, and the

Smith Richardson Foundation for their support.

The author also wishes to thank the National Institution on Money in State Politics for the data

used in this research and the Campaign Finance Institute’s Justin Koch, Michael Parrott and

Brendan Glavin for their invaluable assistance in preparing and analyzing the data.

RELATED REPORTS

Additional CFI reports on public financing and tax credits in state and local elections:

DEMOCRACY CREDITS: An Analysis of Washington’s Proposed Voucher Initiative

WOULD REVISING LOS ANGELES’ CAMPAIGN MATCHING FUND SYSTEM MAKE A DIFFERENCE?

Comparing Matching Funds in Los Angeles and New York.

CITIZEN FUNDING FOR ELECTIONS: What do we know? What are the effects? What are the

options?

DONOR DIVERSITY THROUGH PUBLIC MATCHING FUNDS (Joint study with the Brennan Center)

SMALL DONORS, BIG DEMOCRACY: New York City’s Matching Funds as a Model for the Nation

and States (Election Law Journal)

All of these reports, and others, are available at http://cfinst.org/state.aspx#research

Predicting the Impact

of Democracy Vouchers:

Analysis and Questions in Light of South Dakota’s Successful Initiative

Michael J. Malbin

The Campaign Finance Institute

CONTENTS

EXECUTIVE SUMMARY 1

INTRODUCTION 3

BACKGROUND AND METHOD 4

THE SOURCES OF SOUTH DAKOTA’ S CAMPAIGN MONEY IN RECENT ELECTIONS 5

Table 1: Sources of Funding for South Dakota’s State Legislative and

Gubernatorial Candidates, 2012-2014. 6

Table 2. Donor Diversity in South Dakota’s Elections 8

A PORTRAIT OF A SYSTEM WITH DEMOCRACY CREDITS 9

Table 3: Contribution Limits under Current Law as well as the Proposed Limits

for Candidates Who Accept and Do Not Accept Democracy Credits 10

Table 4: Sources of Funding for South Dakota’s State Legislative and

Gubernatorial Candidates, 2012-2014: Current vs. Hypothetical 12

Table 5. Number and Cost of the “Democracy Credits” Candidates Would

Need under the Two Hypotheticals, Compared to the Actual Number of

Individual Donors in 2014 and 2014. 15

CONCLUSIONS AND QUESTIONS 17

WORKS CITED 20

1

EXECUTIVE SUMMARY

The voters of South Dakota in November 2016 decided, by initiative, to enact the nation’s first

statewide voucher-based system of public campaign financing. Vouchers represent a new

approach in campaign finance law. Reformers are encouraged by this state-level victory, while

the skeptics remain skeptical. Because of the ballot box success, we would not be surprised to

see imitation in future years. Reports shortly after the election have said the initiative’s

constitutionality will likely be challenged in courts. But whatever the outcome in court, future

proposals will attempt to take lessons from South Dakota. This report is aimed at those future

efforts. We believe this initiative is important enough to warrant detailed analysis before new

proposals reach the design stage. Specifically, the report makes predictions and raises

questions about how the new law is likely to work out in practice. In addition to serving as a

first review of one state’s innovation, the exercise is meant to serve as a basis for thinking

about vouchers, small donor matching funds, and similar initiatives elsewhere.

The bulk of the report contains two sections that focus on South Dakota. The first considers the

status quo of campaign financing in South Dakota before the initiative, based on the Campaign

Finance Institute’s analysis of data supplied by the National Institute on Money in State Politics.

In the second, we project how the new program might work out in practice, using

methodologies CFI has developed in seventeen years of nonpartisan, peer-reviewed research

on money in politics. This analysis will show that the new vouchers and contribution limits are

likely to have major effects. Some are likely to serve the supporters’ goals. Others raise

questions. To summarize the most important expectations and questions:

• Current donors: At a minimum, we expect the voucher system to reduce the

importance of direct contributions from political action committees (PACs), most of

which have been business-oriented. These organizations supplied an extraordinarily

high 73% of the money raised by South Dakota’s incumbent state legislators in 2012 and

2014.

• New donors: Vouchers should successfully accomplish some of their main goals by

increasing the importance of small donors and putting financial power in the hands of

many who currently give nothing. We have reason to expect that the new donors will be

more demographically representative than current donors. We do not yet know

whether they will be more politically representative or polarized than current donors, or

more inclined toward issues promoted by organizations that fare well in the new

environment.

• Candidate participation: In any public financing system, the willingness of candidates to

participate will depend upon how they weigh the value of the public funds against what

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they have to give up by participating. In South Dakota, accepting the vouchers means

accepting lower contribution limits, including a zero limit for political parties and PACs.

For reasons explained at greater length in the report, we expect the combination of

rules such as these that are specific to South Dakota will affect participation in this state

by incumbents and others who can raise more money under the existing rules.

• Political parties and interest groups: Any voucher or public financing system will

reshape the role of political parties and interest groups, but the precise effects will

depend upon the mix of incentives in any given law. South Dakota’s initiative prohibits

participating candidates from accepting contributions from parties or PACs. This is

different from other voucher proposals and it effectively invites parties and interest

groups to find alternative ways to participate. Increased independent spending is

therefore one likely development. But we would also not be surprised to see

membership-based interest groups and organizations, as well as political parties,

working hard to induce their members to donate their vouchers to the organizations’

preferred candidates. Those most likely will be large membership groups, such as labor

unions, and issue advocacy groups on the left and right. Corporations would also be

likely to urge their employees to contribute as most of them do now to increase

participation by employees in their PACs. Whether the effects of any of these

developments would be desirable remains an open question. This report briefly

summarizes the advantages and disadvantages of such developments.

• New candidates: Finally, the new sources of campaign funding should make running for

election financially more feasible for new candidates. However, it remains unclear

exactly how the new candidates will differ from current candidates. The answer is likely

to depend in part on whether interest groups recruit candidates to run, and

subsequently help finance their campaigns by steering contributions in their direction.

After articulating and analyzing these questions, the report concludes by emphasizing the

importance of future research. Analysts should consider all of these questions as South

Dakota’s new voucher system becomes operational. If unintended consequences do occur,

researchers should ask whether they occurred in response to the basic concept of vouchers, or

to South Dakota’s specific design features. To parse out this issue, we will need comparative

analyses of new program models as they are being implemented (in South Dakota, Seattle

[WA], and Montgomery County [MD]), alongside reviews of the full variety of continuing

matching fund, flat grant and tax credit programs in states and cities across the United States.

(See CFI’s report Citizen Funding For Elections: What do we know? What are the effects? What

are the options?)

3

INTRODUCTION

The voters of South Dakota in November 2016 decided, by initiative, to enact the nation’s first

statewide voucher-based system of public campaign financing. In its entirety, the measure

(known formally as Initiated Measure 22) will affect many aspects of campaign finance,

lobbying, and ethics law. This report will focus only on the most innovative of the initiative’s

provisions – the ones creating a system in which the government will give two $50 “Democracy

Credits” (vouchers) to every one of the state’s registered voters. The voters will be free to give

these vouchers to the state candidates of their choice as long as the candidates agree to abide

by lower contribution limits for their non-voucher private contributions. One goal of the new

credits is to democratize financial participation in politics by giving candidates a stronger

incentive to hear the voices of citizens previously unheard. Deeply intertwined with the new

vouchers were provisions lowering campaign contribution limits. These were lowered below

2016 levels for all candidates, but they were made even lower for candidates who voluntarily

accept vouchers. (The vouchers and contribution limits are described more fully in a footnote1.)

Vouchers represent a new approach in campaign finance law. Reformers are encouraged by this

state-level victory, while the skeptics remain skeptical. Because of the ballot box success, we

would not be surprised to see imitation in future years. Reports shortly after the election have

said the initiative’s constitutionality will likely be challenged in courts. But whatever the

outcome in court, future proposals will attempt to take lessons from South Dakota. This report

is aimed at those future efforts. We believe this decision by South Dakota is important enough

to warrant detailed analysis before new proposals reach the design stage. Specifically, the

report makes predictions and raises questions about how the new law is likely to work out in

practice. In the course of doing so, it will use techniques that can also serve as a basis for

considering vouchers, small donor matching funds, and similar initiatives elsewhere. It will dig

below the surface to analyze aspects of initiative that may not have made headlines during the

campaign.

1 Initiated Measure 22 does the following:

• The initiative lowers contribution limits for all candidates and creates a system of “democracy credits”

(state-funded vouchers) to be funded by appropriations and other sources.

• Candidates who choose not to participate in the voucher system will have lower contribution limits than

under current law; candidates who choose to participate would have still lower limits. The new limits are

shown in Table 3 below.

• Registered voters will receive two $50 credits from the state for an election cycle. They may give one or

both to the participating candidate(s) of their choice.

• No legislative candidate may receive more than $15,000 in credits during an election cycle. For

gubernatorial candidates, the maximum is $700,000.

• The total amount of credits distributed in a two year cycle may not exceed $6 million for all legislative

candidates combined or $4 million for all gubernatorial candidates combined.

4

We know from CFI’s past work about the importance of this detailed type of analysis. The three

major public campaign financing alternatives to vouchers are flat grants, matching funds and

tax credits. But programs that fall into the same categories do not all have the same effect. For

example, CFI’s research on small donor matching funds in New York City and Los Angeles has

shown that even though the two programs look similar on the surface, they have different

outcomes in practice. The details of the two cities’ programs mattered a great deal. We predict

that they will matter in South Dakota as well.

BACKGROUND AND METHOD

Campaign finance vouchers have been discussed for some time by scholars (Adamany and

Agree 1975; Hasen 1996; Ackerman and Ayres 2002.) However, vouchers are new to American

elections. The city of Seattle recently adopted vouchers for municipal elections, but that system

has not yet had its first test run.2 As a result, there are no direct comparisons on which to draw

for estimating likely outcomes. Nevertheless, it is possible to use reasonable and fully

transparent scenarios to help understand the range of plausible possibilities. The conclusions

are based on a detailed analysis of the state’s campaign finance records (supplied by the

National Institute on Money in State Politics), using methodologies CFI has developed in

seventeen years of nonpartisan, peer-reviewed research on money in politics. It will show that

the vouchers and contribution limits in this initiative are likely to have major effects. Some are

likely to serve the supporters’ goals. Others raise questions.

We arrive at these conclusions after developing two hypothetical scenarios to project how the

credits are likely to be used in a real election. One is based on the conservative assumption that

candidates will only raise enough money through the new credits to replace the money they

would lose under the initiative’s lowered contribution limits for participating candidates. We

develop this conservative scenario because accepting the credits would also mean accepting

lower contribution limits. The trade-off would be entirely voluntary for any candidate. As a

result, we assume that candidates would not participate unless they felt that the vouchers

would offset the money they would lose through the lower contribution limits. This scenario

therefore can be seen as a baseline. Another scenario imagines every candidate receiving the

maximum number of credits to be allowed under the new law. This is highly unlikely but allows

us to develop a top estimate. The most likely result would fall somewhere between.

The remaining pages of this report will present the evidence behind our conclusions. It will be

presented in two major parts. The first will analyze the system in place up until now by briefly

2 The full State of Washington rejected a similar voucher system in November 2016 by a margin of 47-53. The

Campaign Finance Institute published a pre-election analysis of the Washington proposal that is available here.

5

Figures 1 & 2

describing the candidates’ sources of funds in 2012 and 2014 along with a demographic

overview of the locations in which those donors lived. The second major portion of the report

will show how we expect the system to change using two different sets of assumptions. We do

not present these hypothetical portraits as firm predictions. Rather, they are meant to offer a

sense of the new system’s implications.

THE SOURCES OF SOUTH DAKOTA’S CAMPAIGN MONEY IN RECENT ELECTIONS

Very few individual donors gave any money at all to candidates in

South Dakota’s state elections in 2012 or 2014, the two most recent

election cycles for which we have complete data. According to

previously published studies from the Campaign Finance Institute

(CFI), about 2% of the adult population gave contributions to South

Dakota’s gubernatorial or state legislative candidates in 2012 or

2014 (CFI, 2015a and 2015b). While this put South Dakota among

the top ten states in CFI’s published list of donor participation rates

in state elections, it nevertheless meant that 98% of the state’s

adults gave nothing. Financially, therefore, the political game was

being played by only a select few.

South Dakota’s legislative elections have generally not been

expensive. Incumbents running for re-election to the Senate raised

an average of about $26,000 in 2012 and $19,000 in 2014. Non-

incumbents raised about $15,000 in both 2012 and 2014. In House

elections, the incumbents raised about $13,000 in 2012 and $9,000

in 2014. Non-incumbents raised $10,000 in both 2012 and 2014.

The picture was different in the gubernatorial election. The

incumbent Governor, Dennis Daugaard (R), raised $3.1 million on

the way toward winning reelection in 2014 with more than 70% of

the general election vote. His main opponent, Susan Wismer (D),

raised barely 10% as much money ($336,972) and received 25% of

the vote. (Independent Mike Meyers received the remaining 4% of

the vote.)

Table 1 shows the percentage of their funding that candidates

received from individuals, political parties, and non-party

organizations (including political action committees or PACs). Self-

financing is excluded. (Figure 1 averages the two elections.)

Contributions from individuals were aggregated by what we have called the donor-candidate

dyad (Malbin et al., 2012). If an individual gave four $250 contributions to one candidate, the

6

donor would have been classified in this table as having given $751 or more. If the same donor

gave $250 to each of four candidates, the donor would have been classified with the $250-or-

under group for each candidate. That is where the donor belongs from the candidate’s

perspective as well as from the perspective of the contribution limits in any state’s law.

Table 1. Sources of Funding for South Dakota’s State Legislative and

Gubernatorial Candidates, 2012-2014 (% of receipts) Contributions from Individuals (Aggregate) Political

Parties

Non-Party

Organizations $1-$250 $251-$750 $751 or more

House, 2012

All candidates 34% 8% 8% 3% 47%

Incumbents 25% 5% 3% 3% 64%

Non-Incumbents 40% 10% 11% 3% 36%

House, 2014


Incumbents 22% 6% 5% 3% 64%

Non-Incumbents 28% 11% 11% 7% 44%

Senate, 2012


Incumbents 21% 8% 7% 9% 56%

Non-Incumbents 39% 9% 9% 6% 37%

Senate, 2014


Incumbents 17% 4% 3% 5% 72%

Non-Incumbents 30% 9% 5% 8% 48%

Gubernatorial, 2014

All candidates 5% 7% 81% <1% 6%

Incumbents 3% 7% 85% <1% 5%

Non-Incumbents 24% 14% 40% 4% 19%

NOTE: Does not include self-financing.

SOURCE: Campaign Finance Institute; data from the National Institute on Money in State Politics

The table shows that non-party organizations (NPOs) were responsible for about half of the

money in South Dakota’s legislative elections in 2012 and 2014. When the candidates are

separated by incumbency status, House and Senate incumbents received about one and one-

half times as large of a portion of their money from NPOs as non-incumbents. The bulk of the

money in the gubernatorial election came from individuals. The table shows 85% of Gov.

Daugaard’s receipts coming from donors who gave $751 or more. In fact, more than half (53%)

came from donors who gave $2,000 or more.

7

For the next table (Table 2) the Campaign Finance Institute geo-coded all disclosed donors’

addresses and placed them into their respective census block groups (CBG). According to the

U.S. Census Bureau, block groups “are generally defined to contain between 600 and 3,000

people”.3 This is much smaller than a zip code. This number of people could live on one city

block of densely populated apartment houses or a cluster of blocks with smaller dwelling units.

It would be preferable for analysis, of course, if we knew the income and racial identity of

individual donors, but this is not possible. Therefore, knowing something about the fine-grained

locations in which donors reside will have to stand as a reasonable surrogate. After geo-coding,

we divided the CBGs into ones with donors who made contributions of $101-$250 and those

with donors who gave more than $250. Some CBGs had donors in both groups and therefore

had their data included in each of the groups. Because South Dakota does not itemize

contributions from donors who give $100 or less, this lack of information about those who gave

$1-$100 substantially constrains the conclusions we can draw.

3 U.S. Census Bureau, “Geographic Terms and Concepts – Block Groups.” Available at

http://www.census.gov/geo/reference/gtc/gtc_bg.html. Accessed July 27, 2016.

8

Table 2. Donor Diversity in South Dakota’s Elections

Comparing Census Block Groups (CBGs) Having Itemized Smaller Donors ($101-$250)

with CBGs Having Donors Who Give Larger Amounts ($251 or more)

Donors

who gave …

House

2012

House

2014

Senate

2012*

Senate

2014*

Governor

2012

% of the state’s CBGs with

donors who gave …

$101-$250 45% 36% 40% 24% 33%

$251 or > 22% 25% 23% 11% 51%

Average aggregate

contribution, in CBGs with

donors who gave …

$101-$250 $173 $181 $175 $163 $213

$251 or > $719 $719 $710 $650 $1812

INCOME: Median household, as

% of the statewide median, in

CBGs with donors who gave …

$101-$250 110%*** 108%** 109%*** 112%*** 112%***

$251 or > 115% 114% 117% 114% 109%

POVERTY: % in CBG as a % of

the statewide rate in CBGs

with donors who gave …

$101-$250 95% 97% 88% 82% 88%

$251 or > 85% 71%** 92% 84% 91%

RACE: % nonwhite as a % of the

statewide rate in CBGs with

donors who gave …

$101-$250 91% 98% 91% 113% 101%

$251 or > 88% 89% 89% 116% 89%

NOTE: The rows for Income, Poverty and Race measure statistical significance in the following ways. For

small donors, significance is calculated using difference in means t tests for small donors’ CBGs and

statewide CBGs. For large donors, significance is measured as the difference in means between small

and large donor CBGs. *p<0.1;

**p<0.05;

***p<0.01

Most of the cells showed as not being significant for two reasons: (1) the relatively small number of CBGs in

the state, and (2) the fact that we do not have names and addresses for donors below $100.

SOURCE: The Campaign Finance Institute (CFI), based on data from the National Institute on Money in

State Politics and US Census Bureau. CFI geo-coded each donor by CBG.

The first two rows of the table are unremarkable, telling us how many CBGs have smaller and

larger donors in them and how much the donors in each group typically gave. (Note that the

average contribution for smaller donors is higher than it would be if we had the addresses for

all donors.) In contrast, the final three rows tell a suggestive story. These show household

incomes, poverty rates, and the percentages of nonwhite residents in the CBGs with smaller

donors compared to those with larger donors. Asterisks are used to show statistically significant

differences. For the large donor rows, asterisks mean that the large donors were significantly

9

different from the small donors. Significance in the small donors’ rows refers to the difference

between the small donor CBGs and the statewide average.

The table shows that donors who gave $101 or more came from block groups with significantly

higher incomes than the state as a whole. There was not a statistically significant difference

between smaller and larger donors: all were above average. Other categories did not show the

statistically significant differences that they do in most other states. We suspect this is at least

partly because of the low number of CBGs in the state.

While we cannot be definitive on this point, we are fairly confident that small donor CBGs

would have been more representative if unitemized donors were included. More importantly

for the discussion at hand, even the currently noticeable differences between the various donor

CBGs and statewide income averages tell us that users of the Democracy Credits will almost

surely be more representative of the population as a whole. With the vouchers being cost-free

to the donors, affordability will no longer be a deterrent to giving.

A PORTRAIT OF A SYSTEM WITH DEMOCRACY CREDITS

Much of the discussion on both sides of the debate about vouchers nationally has been based

on characterizations without quantification. This section of the report will give a quantitative

sense of what the donor mixture might look like if candidates chose to participate in the

system, accepting the lower contribution limits that come along with accepting Democracy

Credits. To develop a quantitative sense of the implications, we have created hypothetical

scenarios assuming the following:

1. Each of the candidates who ran in 2012 and 2014 would continue to do so;

2. Each of the donors who gave in 2012 and 2014 would do so, but only up to the new

legal maximum;

3. No new candidates would be brought into the system, and no new donors except

through Democracy Credits; and

4. Every candidate chooses voluntarily to participate in the system.

There is a certain unreality to these assumptions. At least some of the donors who max out

under the lower contribution limits are likely to transfer some money to other candidates.

More importantly, credits are likely to persuade new candidates to run. We acknowledge these

limitations, but believe the scenarios nevertheless provide a useful portrait.

The scenarios have to be developed against a more complete understanding of how the

proposal’s specific contribution limits would work. Under the new system, every candidate in

South Dakota will be running with lower contribution limits than under previous law.

10

Candidates who choose to accept Democracy Credits would have to agree to lower limits than

candidates who do not accept them. The limits for legislative and gubernatorial candidates are

summarized in the table below. (The initiative also changes the limits for other offices but they

were not analyzed in this report.)

Table 3. Contribution Limits under Previous Law, as well as the Limits for

Candidates Who Accept and Do Not Accept Democracy Credits under Initiated

Measure 22.

FROM INDIVIDUALS FROM PACS FROM POLITICAL PARTIES

Previous

Law

Does

Not

Accept

Credits

Accepts

Credits

Previous

Law

Does

Not

Accept

Credits

Accepts

Credits

Previous

Law

Does

Not

Accept

Credits

Accepts

Credits

Legislative $1,000 $750 $250 No limit

$750 $0 No limit

$5,000 $0

Gubernatorial $4,000 $4,000 $500 $4,000 $0 $40,000 $0

SOURCES: Initiated Measure 22 and Current Law.

Measure 22 does not strongly affect the maximum contribution from individuals to non-

participating candidates. The limit for a legislative candidate would drop from $1,000 to $750

per year while the limit for gubernatorial candidates would remain unchanged at $4,000. In

contrast, candidates who want to accept the Democracy Credits will have to accept much lower

limits than their non-participating counterparts – $250 for legislative candidates and $500 for

gubernatorial. As shown below, this will have an effect on the number of credits a candidate

would need to remain “whole” – i.e., to replace the money lost to the new limits.

The effects on contributions from PACs and parties would be more substantial. Both kinds of

organizations could make unlimited contributions through 2016. Measure 22 limits party and

PAC donations to candidates who do not accept vouchers. Even more significantly, neither

parties nor PACs will be able to make any contributions to a candidate who accepts vouchers.

Being zeroed out clearly would force these organizations to adapt. The political parties would

be most likely to shift to independent spending. Non-party organizations (NPOs) would have to

look at independent spending or persuading their own members to contribute Democracy

Credits to the organization’s favored candidates.

Two Scenarios: We can now make further assumptions to create two very different

hypothetical situations. These scenarios are not predictions. Rather, they are intended to offer

a framework for understanding some likely possibilities. In all scenarios, we assume the actual

candidates of 2012 and 2014, and we assume that each of their donors would continue to

contribute the same amount as they had in the past, but only up to the new contribution limit.

11

As noted, any candidate who accepts Democracy Credits would have to abide by lower

contribution limits than those do not to accept the credits. It is difficult to imagine a candidate

volunteering to participate unless the candidate could attract enough credits to replace the

money lost through the new contribution limits. In the first scenario (Hypothetical 1: Baseline

Estimate), therefore, we assume that all candidates participate and that each raises only the

money that she or he will need to remain “whole” – that is, to replace the money lost through

the new limits. We consider this to be a low estimate, or baseline, if all candidates participate.

The second scenario (Hypothetical 2: Maximum Estimate) goes to the opposite extreme. It

assumes not only that every candidate participates but that everyone raises the maximum

amount the new law would allow. For Senate candidates, the maximum of $15,000 in credits

would be about equal to the total funds raised by current Senate candidates. The gubernatorial

maximum of $700,000 would be well below the $3.1 million raised by the incumbent Governor,

but well above the mount raised by any of the other 2014 candidates. Both scenarios are surely

wide of the mark, with the most likely results falling somewhere between. However, the two

provide boundaries for getting a grasp of the likely results. Table 4 shows the distribution of

funding sources under the status quo and the two hypotheticals.

One final caveat should be considered before reading the table: the column marked

“Democracy Credits” only includes the value of credits that would bring new money into the

system – whether from new donors, or from old donors who use the credit to bring new money

into the system by giving the credit while they continue to contribute their private funds. In

reality, some credits may replace individual contributions, particularly from small donors.

However, we cannot know how much this will occur. In addition, this kind of replacement will

not help the candidate make up for lost money. We therefore do not include a replacement

effect in the table.

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Table 4. Sources of Funding for South Dakota’s State Legislative and

Gubernatorial Candidates, 2012-2014: Current vs. Hypotheticals

From Individuals (Aggregate) Parties

Non-Party

Orgs

Democracy

Credits $1-$250 $251-$750 $751+

House, 2012

Actual 34% 8% 8% 3% 47% –

None Participate, New Limits 39% 18% – 3% 40% –

All participate, baseline 45% – – – – 55%

All participate, max credits 22% – – – – 78%

House, 2014

Actual 25% 9% 7% 5% 54% –




Senate, 2012

Actual 30% 9% 8% 7% 47% –




Senate, 2014

Actual 24% 5% 5% 6% 59% –




Governor, 2014 $1-$250 $251-$500 501+ Parties Non-Party

Orgs

Democracy

Credits

Actual 5% 7% 81% <1% 6% –

None Participate, New Limits 5% 7% 85% <1% 3% –

All participate, baseline* 7% 35% – – – 58%

Only top two, baseline* 9% 46% – – – 45%

All participate, max credits 7% 7% – – – 85%

Only top two, max credits 7% 34% – – – 59%

NOTE: Does not include self-financing.

ASSUMPTIONS:

Baseline Hypothetical: (1) The same donors continue to give private contributions, up to the new legal maximum;

(2) All candidates participate; (3) Each candidate raises exactly enough new money from Democracy Credits as is

needed to replace the money lost through contribution limits (compared to non-participating candidates). (4) The

Incumbent Governor receives the $700,000 maximum – not enough to make up the difference.

Max Credit Hypothetical: (1) The same donors continue to give private contributions, up to the new legal

maximum; (2) All candidates participate; (3) Every candidate raises the maximum in Democracy Credits that

would be allowed under the initiative -- $700,000 for gubernatorial candidates and $15,000 for legislative. SOURCE: Campaign Finance Institute; data from the National Institute on Money in State Politics.

13

Figure 3: Sources of Funds for All Legislative Candidates, by Percentage

Table 4 and Figure 3 (above) measure the baseline estimate (Hypothetical 1) by calculating the

amount of money the candidates would lose because of the contribution limits and assuming

they would replace the lost money with credits. The calculation assumes that all candidates

would take some reduction in money because of the contribution limits that Measure 22

imposes on non-participating candidates. It then assumes that candidates would only

participate if the credit could replace the further money lost because of the still-lower limits

that apply to participating candidates. (The gap would have been larger if it was measured

against actual 2012 and 2014 receipts, but not by much.) Calculating against the new baseline

presents a choice that would be more realistic for a candidate operating under the new system

who is deciding whether to take the Democracy Credits.

Under the status quo, NPOs are by far the most important sources of money for state legislative

candidates. Under the new system, the contribution limits alone are not likely to produce much

of a change in the proportional importance of different categories of donors. In contrast,

introducing the credits, zeroing out the PACs and parties, and reducing the contribution limit

for individual donors (to $250 for legislative and $500 for gubernatorial candidates) could

produce a huge impact if the candidates chose to accept the credits. However, whether they

would opt in remains an open question. There would have been no reason for the incumbent

Governor to opt in because the maximum credits available to him ($700,000) would not come

close to replacing the private money he would lose under the new contribution limits.

14

However, we can try to ascertain whether candidates might have participated by considering

how many credits it would take to reach the needed level.

We turn now to Table 5. Because the situation would be very different for incumbents and non-

incumbents, they are shown separately. Also shown for perspective are the numbers of

individual donors candidates have under the current system. The numbers of actual donors

(second column from the far right) include estimates for the unitemized donors derived by

dividing the unitemized money by 50 (half of the disclosure threshold). The column on the far

right shows the numbers of donors as percentages of the adult population (voting age

population or VAP) in the average district. In the columns for the hypotheticals, the

percentages of adults a candidate would need to recruit are based on the assumption that each

new donor will give only one credit to each candidate. Candidates who can persuade donors to

give them both credits will need fewer new donors.

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Table 5. Number of “Democracy Credits” Candidates Would Need under

the Two Hypotheticals, Compared to the Actual Number of Individual

Donors in 2012 and 2014 (Incumbents and Non-Incumbents)

Hypothetical 1: Baseline Hypothetical 2: Maximum Actual Donors

# CREDITS

NEEDED /

CANDIDATE

(AVERAGE)

COST OF

THE

CREDITS

(TWO-YEAR

TOTAL $

FOR STATE)

% OF

VAP

NEEDED IF

1 CREDIT/

DONOR*

# CREDITS

NEEDED /

CANDIDATE

(AVERAGE)

COST OF

THE

CREDITS

(TWO-YEAR

TOTAL $ FOR

STATE)

% OF

VAP

NEEDED

IF 1

CREDIT/

DONOR*

#

INDIVIDUAL

DONORS/

CANDIDATE

(AVERAGE)**

% OF

VAP

GIVING

(AVERAGE)

House, 2012

Incumbents (45) 152 342,118 0.8% 300 675,000 1.7% 51 0.3%

Non-Incumb (90) 44 358,335 0.2% 300 1,350,000 1.7% 60 0.3%

House, 2014

Incumbents (46) 185 424,787 0.3% 300 326,603 1.7% 57 0.3%

Non-Incumb (72) 92 330,329 0.3% 300 491,572 1.7% 49 0.3%

Senate, 2012

Incumbents (26) 253 328,619 1.4% 300 390,000 1.7% 82 0.5%

Non-Incumb (44) 183 402,259 1.0% 300 660,000 1.7% 92 0.5%

Senate, 2014

Incumbents (23) 204 234,869 1.1% 300 345,000 1.7% 51 0.3%

Non-Incumb (34) 111 187,902 0.6% 300 510,000 1.7% 76 0.4%

Gov. 2014

Incumbents (1) 14,000 700,000 2.2% 14,000 700,000 2.2% 2,511 0.4%

Non-Incumb (4) 1,960 98,020 0.3% 14,000 2,800,000 2.2% 1,209 0.2%

NOTES: Does not include self-financing. Participating candidates would have to limit their self-financing.

*The % of VAP needed under the hypotheticals is calculated as the average incumbent’s or non-incumbent’s

number of credits needed (or number of donors) divided by the average VAP for each of South Dakota’s

districts.

**The number of actual donors includes an estimate for unitemized donors. Since the state’s disclosure threshold

is $100, we assumed the average unitemized donor gave half, dividing the unitemized total by 50. ASSUMPTIONS: Baseline Hypothetical: (1) The same donors continue to give private contributions, up to the new legal maximum;

(2) All candidates participate; (3) Each candidate raises exactly enough new money from Democracy Credits as is

needed to replace the money lost through contribution limits (compared to non-participating candidates). (4) The

Incumbent Governor receives the $700,000 maximum – not enough to make up the difference.

Max Credit Hypothetical: (1) The same donors continue to give private contributions, up to the new legal maximum;

(2) All candidates participate; (3) Every candidate raises the maximum in Democracy Credits that would be

allowed under the initiative -- $700,000 for gubernatorial candidates and $15,000 for legislative. SOURCE: Campaign Finance Institute; data from the National Institute on Money in State Politics.

16

It is clear even without the tables that the incumbent Governor would have had no financial

incentive to participate in the system. The Governor raised little of his money from PACs and

none from the party. Most of his receipts came from individual contributions, which would not

be affected by new contribution limits if he opted out. However, the $500 limit for individual

contributions to candidates who opt in would mean losing about $1 million. Since he would not

be allowed to gather more than $700,000 in credits, this means he would be bound to lose

money by participating.

The incumbent Senators of 2012 also would have been faced with a tough choice. They would

need to gain Democracy Credits equal to about 1.4% of the adult population in their districts in

order to remain whole. Because PACs would still be providing more than half of non-

participating candidates’ total receipts under the new system, it would take this many credits to

replace the zeroed out PAC money for candidates who opt in. Replacing this much would not be

easy, but possible with revamped fundraising techniques. In the most successful states with

100% tax credits or rebates today, about 5% of the tax returns do claim a tax credit for

contributions to all offices combined. The problem for the 2012 Senate incumbents is that the

amount they would have needed to remain whole would be almost as much as the maximum

amount they would be allowed to accept. With so little space between the minimum needed

and maximum, the incentives would not favor their opting in.

In contrast, the new system would provide a significant Democracy Credits incentive for the

remaining candidates – Senate incumbents of 2014, House incumbents in 2012 and 2014, and

gubernatorial non-incumbents in 2014. The number of credits they need to remain whole

would be quite feasible, and the system would allow plenty of space for them to raise more

than they do now. Additionally, the new funding sources would just about reverse the old

mixture. Instead of depending on large donors or PACs, all of a participating candidates’ money

would come either from small donors or Democracy Credits.

Reaching the maximum would likely be difficult for most candidates, especially if they relied

only on the traditional fundraising methods they have used in the past. However, we can easily

imagine candidates developing social networking capacities at low cost, and we would expect

to see organizations mobilizing their membership bases to contribute to favored candidates.

With the credits in effect being free to the donor, it would not be surprising to see numbers

well above the baseline – although likely not as many as would be needed for most candidates

to reach the maximum.

The estimated two-year baseline cost for the credits – under the unlikely assumption that all

candidates would have participated – is as follows: $1.4 million for legislative candidates in

2012, $1.2 million for legislative candidates in 2014, and $1.3 million for gubernatorial

candidates in 2014. The cost for the maximum estimate would have been $3.8 million for

legislative candidates in 2012, $2.6 million for legislative candidates in 2014, and $3.5 million

17

for five gubernatorial candidates in 2014. The maximums are well within the initiated

measure’s budgets of $6 million for all legislative candidates and $4 million for all gubernatorial

candidates. This would allow plenty of room for the system to accommodate new candidates.

CONCLUSIONS AND QUESTIONS

Measure 22 will have deep effects on South Dakota’s politics. Because many of the effects are

speculative at this point, we put them forward in this conclusion as a series of speculative

propositions or questions. These should be tested through further research once the new

system has been implemented.

• Current donors: At a minimum, we expect the voucher system to reduce the

importance of direct contributions from political action committees (PACs), most of

which have been business-oriented. These organizations supplied an extraordinarily

high 73% of the money raised by South Dakota’s incumbent state legislators in 2012 and

2014. Such a relative decline should occur in any system that stimulates participation by

small donors. It should be especially true in South Dakota, which will prohibit

participating candidates from accepting PAC contributions.

• New donors: Vouchers should increase the importance of small donors and put financial

power in the hands of many who currently give nothing. We have reason to expect that

the new donors will be demographically more representative than current donors, but

we do not yet know whether they will be more or less politically representative or

polarized than current donors, or more inclined toward the specific issues of interest

group that persuade new donors to come into the system. These questions would arise

with any voucher system, as well as for a well-designed small donor matching fund

system, but we expect that the answers will vary with specific provisions and systems. In

addition, because vouchers are literally free to the donor, we would expect even more

voters to contribute vouchers than give small contributions in a matching fund system.

But precisely because vouchers are free to the donor, we do not know whether they will

have as strong of an effect as matching funds in stimulating new donors to become and

remain active in the system in other ways beyond giving.

• Candidate participation: In any public financing system, the willingness of candidates to

participate will depend upon their weighing the value of the public funds against the

cost of what they have to give up. For example, the presidential public financing system

has fallen into disrepair because taking the public money means accepting a spending

18

limit that has become too low for modern campaigns. In South Dakota, accepting the

vouchers means accepting lower contributions limits. We expect that candidates will

agree to this trade only if the vouchers at least make up for what they will lose.

However, the South Dakota also imposes a relatively low ceiling on the maximum

number of vouchers per candidate. The ceiling is not much higher than the minimum

some candidates will need to remain “whole”. We therefore expect this combination of

rules governing trade-offs and maximums will affect candidate participation. This is

important because the ultimate goal of any public financing system is to change

relationships between elected officials and the citizens they represent. The program

cannot produce any such effect unless candidates voluntarily choose to participate in it.

• Political parties and interest groups: Any voucher or public financing system will

reshape the role of political parties and interest groups, but the precise effects will

depend upon the mix of incentives in any given law. For example, the State of

Washington’s voters narrowly defeated a voucher initiative in 2016 that would have

introduced a voucher system similar to South Dakota’s. However, the initiative for

Washington – a state which already limits contributions to the parties as well as from

parties to candidates – would not have further cut the limits on political party

contributions to candidates. Washington’s initiative also would only have cut

contributions from PACs and individuals to participating candidates to half of their

current levels. In contrast, South Dakota’s initiative moves from unlimited PAC and party

contributions in past elections to limited contributions for non-participating candidates

and no PAC or party contributions at all for participating candidates. This is likely to

induce parties and interest groups in South Dakota to find alternative ways to

participate. Independent spending would be the most likely venue, considering

precedent in other states. But there is another prospect that may be unique to voucher

systems. If Democracy Credits are used heavily, we would not be surprised to see

membership-based interest groups and organizations, as well as political parties,

working hard to encourage their members to donate their vouchers to the

organizations’ preferred candidates. Because the credits will be cost-free to the donors,

this mobilization by intermediary groups is likely to be more robust than in a small-

donor matching fund system, such as New York City’s (as analyzed in Malbin et al. 2012;

Malbin and Parrott, 2016). The most likely players will be large membership groups,

such as labor unions and issue advocacy groups on the left and right. Corporations

would also be likely to urge their employees to contribute, as most of them do now to

increase participation by employees in their PACs.

19

Whether the effects of any of these developments would be desirable remains an open

question. We know, for example, that democratic participation is enhanced by having

strong intermediary organizations. Taking this point a step further, one could argue that

it may be a good idea for government funds to offer a financial incentive for donor

mobilization by interest groups. There are, however, possible disadvantages: for

example, this action would have a distorting effect, with government funds being used

in effect to favor some kinds of organizations and issues over others. In either case, we

suspect that stimulating interest groups in this way was not the likely intention behind

zeroing out PAC contributions.

• New candidates: New sources of campaign funding should make it possible for new

candidates to run for election. However, we do not know how competitive the new

candidates will be, or how they will differ from current candidates. The answer is likely

to depend in part on whether interest groups recruit candidates to run and then help

finance their campaigns by steering contributions in their direction.

Future research needed: Analysts should consider all of these questions as South Dakota’s new

voucher system becomes operational. While we of course need to understand whether

vouchers produce their intended effects by bringing new donors and candidates into the

political arena, it is equally important to look for unintended consequences. If these

consequences occur, we then must ask whether they were responses to the basic concept of

vouchers or to a particular initiative’s design features. We can begin to answer these questions

by comparing the outcomes in South Dakota with those in the city of Seattle (Washington),

which adopted vouchers a year ago. Additionally, it would be valuable to test the effects of

both of these systems against existing matching fund and clean election systems, along with the

new matching fund program in Montgomery County (Maryland), which is even more generous

than New York City’s. There would be significant challenges in trying to compare cities with

counties and states, particularly when several have yet to conduct their first elections under

their new systems. But when they do, we need to understand the outcomes and possible

consequences, both positive and negative. Based on what we have observed so far, we feel

confident that the devil will be in the details.

Visit CFI’s website at

www.CFInst.org to

read all of our reports

and analyses of money

in politics at the

federal, state and local

levels.

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