Trump’s Education Tax Credit Gambit 

There’s nothing education wonks love more than slapping the word “innovation” onto an idea. The innovation du jour is Donald Trump’s school-choice tax credit, formally known as the “Educational Choice for Children Act,” which the president signed in July. If you read that title and suspect this is a tax diversion to support families who pay, or want to pay, for private or religious school tuition, you’ve got the idea. 

This federal tax credit benefits donors who give to a 501(c)(3) nonprofit “scholarship granting organization” (SGO). These SGOs must award at least 90 percent of donations in scholarships for “qualified” educational expenses, including tuition, fees, academic tutoring, and special needs services, among other items, at public, private, and religious schools. Governors (or other state-designated authorities) must opt into the program annually as well as approve their state’s SGOs. Children in elementary and secondary grades with family incomes of up to 300 percent of their area’s median household income are eligible recipients. This means that wealthier families living in affluent areas will still benefit. By some estimates, nearly 90 percent of the population will qualify. 

“Red” state governors, especially in states that already have private school choice programs, are likely to opt in. Maybe that’s why all the political chatter has been about whether “blue” state governors should opt in as well. And, boy, has there been chatter. 

The “say yes” crowd has been busy, opining in op-eds, blog posts, and webinars touting the tax credit as an innovative way to help underprivileged kids. Public money for private schools may be deeply unpopular among voters. Nonetheless, the tax credit’s cheerleaders have argued that blue state governors can “mold” the program, targeting funds to low-income public school kids for academic tutoring, for example, or outlawing scholarships for providers who don’t meet anti-discrimination or accountability requirements.  

But any connection between the tax credit and better student achievement is murky. There’s no requirement that schools or affiliated vendors meet any academic outcomes, or even that they measure and report them, only that they provide eligible services. There’s also no incentive for schools or affiliated vendors to innovate. Existing operators with client lists, cash flow, marketing, and established programs will have an enormous advantage. New operators will not only need start-up capital but must assume SGOs serving their area will raise enough money to give scholarships to enough kids in large enough amounts, and that their organization will be the beneficiary of enough of this largesse. And that’s to keep their doors open, not to provide quality.  

An even bigger problem: we have no evidence that governors will be able to mold the program at all. The law grants governors only elemental powers (opt in! approve a list!). It leaves guidance to the Department of the Treasury, which must promulgate regulations before January 1, 2027, when the tax credit goes into effect. In late November, the Treasury and the IRS released a request for comment indicating they have no intention of granting governors broad authority. Treasury will almost certainly require governors to “…include all organizations located in the State that have requested to be designated as an SGO and that meet [the law’s] statutory requirements.” That means governors couldn’t exclude SGOs that fund private school tuition or require anti-discrimination rules. A “take it or leave it” program model now seems inevitable.  

If governors can’t mold the program, can SGOs impose their own restrictions? This too is unclear, but the request for comment states Treasury and the IRS “do not anticipate that the forthcoming proposed regulations would prohibit an SGO from itself imposing additional governing provisions beyond the requirements imposed by [the law]…” This may mean that SGOs could target funds to particular students, such as those below a certain income or attending a certain school type, or specific uses, such as private school tuition or academic tutoring. Even if SGOs are allowed this freedom, it won’t automatically lead to better outcomes for low-income or academically at-risk kids. For every SGO that targets low-income public school kids for tutoring, there will be an SGO—or two or three—that targets kids of all incomes seeking to attend religious or private schools. After all, this program was designed to support non-public schools, which already have donors who might be highly motivated by a tax credit.  

And here is the money problem. SGOs can disburse only as much as they raise, a core difference between tax credit programs and state-funded voucher programs. Since the tax credit is not refundable (meaning donors don’t get money back after filing their taxes), donors are merely redirecting the tax money they would have paid to the federal government to an SGO. Tax credit-seeking donors must believe in the cause promoted by an SGO to find it worthwhile. The law doesn’t allow donations, which are capped at $1,700, to be earmarked for a particular student. However, it is silent on whether donors may earmark their contributions for a specific school, as long as the SGO awards scholarships to “10 or more students who do not all attend the same school.” SGOs in wealthy areas that grant scholarships to schools with existing individual donor bases are much more likely to raise significant cash. 

I understand why public school supporters want to be excited about this tax credit. It could result in billions of dollars for SGOs. But let’s call a spade, a spade. This is a private school choice program that might benefit public school students at the margins—if enough SGOs target them, if they can raise enough money, if they give large scholarships…if, if, if. The tax credit is best understood as a stalking horse for private school choice advocates’ long-term effort to secure direct federal funding. Instead of trying to turn the tax credit into something it’s not, public school supporters should focus on how we’re using—and protecting—the resources we already have to give the 49 million children in America’s public schools a much better education.