Mitch Daniels is the leading Republican candidate for governor of Indiana, and he has spent the winter doing the things all such candidates do: attending Lincoln Day dinners (more than three dozen at last count), showing off his made-in-Indiana RV and extolling his own virtues and those of President George W. Bush.

The link with the president is a natural connection for him to make. The 54-year-old Daniels has had a long career in government and in the pharmaceutical business, but he is best known for his stint as Bush's budget director, a post he gave up last year to run for the top job back home. Bush's operatives helped clear the GOP field for Daniels, and the president himself has already made an early campaign appearance for him.

And Daniels, in return, praises Bush to the skies. "Providence was smiling on the United States of America," he told nearly 300 party faithful at a Lincoln dinner in Shelby County, "on that night when George Bush finally became president of the United States." Nearly all Republican regulars agree that sticking close to Bush will be a big help in November. "Around here, Bush is a shoo-in," says Rob Nolley, a Shelbyville city councilman. "Daniels' experience working for him is a big deal."

But Daniels' stamp of approval from the White House has suddenly become a lot harder for him to show off. On the day of the Shelbyville dinner, the Federal Election Commission ruled that Bush cannot appear in endorsement ads proclaiming his fondness for Daniels--or any other Republican--unless Bush's campaign pays for the ad itself. Under the new rules, if Daniels pays for or approves a TV spot that features Bush or even mentions his name, he will technically be making an illegal donation to the Bush campaign. "Absurd is not strong enough a word," Daniels fumes. "If anything we contemplate is really proscribed by that law, it ought to be amended immediately."

The statute Daniels refers to derisively as "that law" is the Bipartisan Campaign Reform Act, known more widely as McCain-Feingold, after its two sponsors in the U.S. Senate. The law was passed by Congress in 2002 and was, for the most part, upheld by the Supreme Court last December. Political professionals are generally familiar with its effects on fundraising by federal candidates and its restrictions on advertising by outside interest groups. But state and local officeholders and party officials are only beginning to sort through the effects the law will have on parties and anyone running for office at the lower levels of the American political system.

Those effects will be profound. All the nuts-and-bolts party work that takes place within 120 days of a federal election--general or primary--such as identifying voters, registering them or bringing them to the polls, has been reclassified as "federal election activity." It is subject to federal regulation and must be paid for with so-called hard money (donations that are limited in amount and require federal disclosure). It doesn't matter whether a local party seeks merely to support its local sheriff. If there is a federal candidate on the ballot, the party's contacts with voters are considered federal activity and subject to the new regulations. "State and local parties can't get around the law by avoiding the mention of a federal candidate's name," warns Donald Simon, counsel to Common Cause and a leading campaign finance lawyer.

"You could interpret this law so broadly that if I tell people to 'vote for the Republican team,' that could trigger federal disclosure and reporting requirements," says Indiana state Representative Mike Murphy, the newly-installed chairman of the Marion County (Indianapolis) Republican Party. "The whole psyche of how people identify with political parties would be damaged if state and local candidates have to put up a Chinese wall between themselves and federal candidates."

CRIMINAL OFFENSES

It's not only going to be harder for state and local parties to help federal candidates--it's going to be difficult for them to promote state and local candidates in federal election years. The law creates new categories of money and makes it much more complicated for parties at various levels--local, state and national--to transfer money among themselves. In California, for example, the Republican Party contracts with its 58 county central committees to handle the work of registering voters. The state party has to explain to the county organizations that it can no longer reimburse them for those costs-- or, if it does, the local party becomes ineligible for receiving other types of financial help from the state or national party, according to Chuck Bell, an attorney for the California GOP.

"The unfortunate consequence of the law, at least in the short term, is that it strains our relationship with the county party committees," says Bell. Even if the county parties manage to raise adequate operating money on their own, they will have to file complex monthly forms with the FEC if they spend just $5,000 a year on registering voters or calling them on Election Day to remind them to turn out. These rules may not be easy to enforce, but there are criminal penalties for violation, and few party officials will want to risk going to jail in order to test the boundaries of the law.

Over the past year, former party officials have been setting up quasi-party organizations known as 527s, after a section of the U.S. tax code. There are legions of these groups, including traditional names such as the Republican Governors' Association and new ones called America Coming Together (pro-Democrat) and Americans for a Better Country (pro-Republican). The 527s were planned as a way to skirt McCain-Feingold's restrictions on parties by spending hundreds of millions of dollars during this campaign year.

But the FEC ruled in February that the restrictions on "federal election activity" during even-numbered years apply to 527s as well as parties. So there appears to be no chance that the 527s will supersede the parties entirely. "I would rather see parties get money rather than outside groups," says Sarah Morehouse, a University of Connecticut political scientist, "because I see the parties as having the ability to broker interests or moderate interests, rather than groups that are single interests and have one ax to grind and can give a lot of money to their candidates."

American political parties are nothing if not adaptable. Once the dominant force in American politics--deciding who would get to run for what office and with how much support--they have found a new role as support organs, offering consulting and fundraising services to self- selected aspirants. Now, with those functions under legal restriction, the parties may be forced into still another role: as clearinghouses of legal advice for avoiding the law's many minefields. "The bottom line," says Wayne Hamilton, a senior adviser to the Texas GOP, "is we tell our local parties to stay completely away from any type of federal activity unless they have the money to hire attorneys that specialize in FEC regulation and federal campaign laws."

Many state parties are currently hosting seminars for local party officials, trying to help them understand the shifting world created by the new law. "It doesn't seem plausible that Congress could regulate bumper stickers for local sheriffs," says state Representative Luke Messer, executive director of the Indiana GOP. "One of the unfortunate consequences of this law is that it weakens parties."

MACHINE POLITICS

Indiana, more than most states, has a powerful party tradition. The Marion County (Indianapolis) Republicans, in particular, operated a formidable political machine, coordinating thousands of volunteers, dominating local offices, running up the score for statewide candidates and providing Richard M. Nixon the solace of knowing there was one big city where he remained popular even during the latter years of his presidency. As state Senator Lawrence Borst recalls in his memoir of 40 years in Indiana politics, the Marion County party used to screen and recruit candidates from county treasurer (still a rich source of patronage jobs) all the way up to the U.S. Senate. The local GOP was instrumental in creating a unified city-county government, which gave Republicans a 30-year lock on the Indianapolis mayor's office--a lock that was broken only four years ago by Democrats, aided by the fact that thousands of Republicans had moved beyond Marion to outer suburban counties such as Shelby, Hendricks and Hamilton.

It wasn't until the 1970s that Indiana did away with the practice of nominating candidates by party convention, rather than open primary. It wasn't until the 1980s that it abolished the custom of entrusting the parties with the lucrative job of running the county vehicle license bureaus. Even now, Indiana's parties receive funds from the sale of vanity license plates--about $750,000 a year for each party, much of which trickles down to county organizations. That may "not be enough money to wad a pop gun," as former Marion County GOP Chairman John Sweezy says, but having three-quarters of a million dollars to start with, even in non-election years, has established a steady income stream that has allowed some party officials to make six-figure salaries and has created more stable careers in politics than are possible in places where parties close up shop in odd-numbered years.

Even in an era of candidate-centered politics, there's been plenty of work for the parties in Indiana to do. During the last gubernatorial campaign, the state Democratic Party and its incumbent, Governor Frank O'Bannon, split the political chores. O'Bannon's team took care of the big money activities, such as polling and media buys. The state party handled direct mail, absentee ballot applications, phone banks, bumper stickers, posters and yard signs. It was a formula that worked very well.

But it cannot be easily repeated this year. Under McCain-Feingold, party activities that once could be split on a prorated basis between federal and state accounts will now have to be paid for entirely with federally regulated dollars (dollars that can come only from individuals in limited amounts). Local parties and candidates for state offices, who can raise large amounts from corporations and unions, have not been in the habit of soliciting strictly limited individual donations or having to account for them. "What will be the reaction of governors and state legislators when they realize state parties can't use funds the way they used to for get out the vote, voter identification and voter mobilization?" asks Benjamin Ginsberg, counsel to the Bush-Cheney campaign and numerous state parties.

Those who believe in the McCain-Feingold approach think the critics are exaggerating the problem. Even under the strictures of the new law, parties will still raise and spend more for candidates this year than any of the outside groups that have sprung up in response to the changing rules. "Party operatives tend to have a worldview that very little regulation is good but even less regulation is better," says Simon, the Common Cause counsel. "The new law doesn't say to them that they can't do any of these activities or work with federal candidates. The law just regulates what kind of money they can use for these activities."

What they can't use is the funding known ubiquitously as "soft money"--contributions that until now have been largely unregulated and could be collected in unlimited amounts from corporations, unions and wealthy individual donors. Under the old system, state parties became conduits for soft money that was spent, sometimes surreptitiously, to support candidates at the federal level. Prior to McCain-Feingold, the rule was that state parties could use soft money for anything that qualified as "party-building activities." But the soft-money exemption grew into an enormous loophole, stretched to the point where national parties were using state parties as conduits for millions of soft- money dollars spent mostly to pay for TV ads.

During the 2000 and 2002 election cycles, the two major national parties gave $472 million in soft money to state parties around the country. In 2002, according to Anthony Corrado, a campaign finance scholar at the Brookings Institution, state parties spent only about $52 million on genuine party-building expenses such as voter registration, buttons and yard signs. Most of the rest went to produce and broadcast advertisements--ads that were essentially immune to regulation or accountability for their cost or content.

LEVIN BUCKS

In cracking down on the abuse of soft money, the authors of McCain- Feingold didn't intend to weaken state parties. They actually tried to help the parties in a couple of ways. One was to double the amount of money they could receive in hard-dollar contributions. Secondly, they created a new category of contributions: the so-called Levin funds. If state law permits, state and local parties can raise Levin funds (named for their Senate sponsor, Carl Levin of Michigan) in chunks of up to $10,000 per year from individuals, PACs, corporations and unions. Levin dollars can be used only for certain expenses related to federal election activity. They can't be used for ads or other communications with the public, and they come with numerous restrictions that lawyers will make a lot of money explaining to parties in the coming months.

Despite the complications, not everybody--even within state party organizations--thinks the parties will necessarily suffer as a result of the new law. As a state senator in 1998, George Jepsen sponsored Connecticut's first-in-the-nation state ban on soft money. "Short of public financing," he says, "if you're looking for ways to restore some sanity to the process, a ban on soft money sort of jumps out at you." Now that Jepsen is chairman of the state Democratic Party, he has to live with that ban. But he says it hasn't been so bad: His fundraising was up by more than a third in 2003, compared with 2001. His party has hired a full-time field director and is providing professional services such as enhanced voter files to town committees and candidates.

In the past couple of years, Connecticut Democrats have made major inroads into traditionally Republican territory, including the affluent suburbs of Fairfield County. Democratic mayors and first selectmen now preside over 70 percent of Connecticut's population. Jepsen attributes these gains at least in part to the Democrats' ability to adjust to the new rules and take advantage of them. "We're turning the party," he says, "from an organ that really just convened conventions and stamped people on the foreheads as Democratic candidates, into a party that actively provides services and reaches out to constituencies."

BAYH-IN

When it comes to national politics, Indiana is a reliably Republican state. Not only does it support the GOP candidate for president every four years but because of its early poll-closing time, it is nearly always the first state to be colored Republican red on network TV maps. Still, Hoosier Republicans have lost the governorship four times in a row, in large part because of Evan Bayh, the popular moderate Democrat who captured the statehouse in 1988 and 1992, then passed it along to his lieutenant governor, Frank O'Bannon, who won in 1996 and 2000. (O'Bannon died last year and his replacement, Joe Kernan, will be the Democratic nominee against Mitch Daniels.)

Bayh's strength not only boosted O'Bannon into the governor's mansion but also has helped Democrats control the state House of Representatives for all but two of the past 16 years. Bayh is in the U.S. Senate now, and he continues to maintain favorability ratings around 70 percent. Indiana Democrats running for lesser offices routinely associate themselves with him to get elected. "Why wouldn't you want to hitch your wagon to somebody like that?" asks Dan Parker, executive director of the state Democratic Party.

But because of McCain-Feingold, that is not so easy anymore. The new law imposes restrictions on using the images of federal candidates, so Bayh probably won't be featured on any of the party's posters in 2004. Merely including the senator's name on an invitation to a party event, Parker says, now requires a disclosure so long and complicated that some traditional donors mistakenly think they're not allowed to give money to the party at all.

Nothing frustrates Parker more than the prospect of losing Bayh's presence in state and local campaigns. Last November, for example, the senator agreed to appear in an ad endorsing Jonathan Weinzapfel, the Democratic nominee for mayor of Evansville. But Bayh knew that McCain- Feingold had changed the rules, so he asked for an advisory opinion from the FEC on whether it was permissible for him to appear on TV on behalf of a local candidate.

In the end, the ad was approved because Bayh wouldn't be on any ballot for more than 120 days (the period of time before a federal election during which most of the new restrictions apply). Candidates who want to use Bayh's image this year--or Republicans such as Daniels who want to feature Bush--can do so only between May 5 (the day after the state's primaries) and July 4, when the 120-day period before the November election opens up.

And even during the brief window in which the ads are legal, any federal office-holder who appears in them can't mention his job title or talk about himself in any way. "I was happy to abide by the new law," Bayh says. "It did, however, make a traditional, innocuous activity more cumbersome and expensive."

As candidates and party officials sort through McCain-Feingold's permutations, many worst-case scenarios are being trotted out. Campaigns for Congress might become legally segregated from state and local officials in ways that could cripple intraparty communication. Zealous local prosecutors may seize on violations for use as political weapons. Campaign consultants worry about having to incur the expense of producing ads far in advance, as Weinzapfel did, to allow the FEC to rule on them--thereby telegraphing strategy to their opponents in the process. Some states are even talking about moving their state elections to odd-numbered years in order to avoid the law's encumbrances.

In the end, none of these things may happen. Bayh is confident that, as the campaign season wears on, the law's complexities will get sorted out. The decision in his case, after all, set the precedent for the new restrictions on ads featuring President Bush. As the FEC's thinking becomes clear, there will be less need for parties and candidates to consult with lawyers on every move they make. Rules that are now unsettling may soon become second nature.

But the most certain outcome of the law, which was designed to limit the influence of money in politics, is still likely to be a perverse one. There will be more money raised than ever--not only by the new 527 groups but also by parties and candidates at different levels of government who previously worked together but now can't rely on each other to make sure the party's message is getting out. "We can't share plans, and we can't coordinate the way we used to," says Don Morabito, executive director of the Pennsylvania Democratic Party. "We're either going to be duplicating our efforts in significant areas, or we might be ignoring important areas. We may be wasting resources or not doing what we need to do."