Funding Education Opportunity: How states are reacting to the new federal tax-credit scholarship

The One Big Beautiful Bill Act, passed this summer, included the Educational Choice for Children Act, the first federal tax-credit scholarship program. The new law allows individual taxpayers to contribute up to $1,700 per year to an approved scholarship-granting organization, which is typically a nonprofit that receives donations and uses the funds to provide tuition assistance to students. While taxpayers can contribute to any scholarship-granting organization, only students residing in states that opt into the program will be eligible to receive a scholarship. The law also specifies that to be eligible, a scholarship recipient’s family’s income must not exceed 300% of their area’s median gross income.

Scholarship-granting organizations have yet to determine the amounts they’ll offer, but recipients will be able to use them to pay for approved education expenses, such as private school tuition, tutoring, and school uniforms. Moreover, many of the program’s details are still in flux because federal lawmakers have left a significant amount of discretion to the U.S. Secretary of the Treasury to establish rules governing the program. 

The letter of law appears to make students in traditional public schools or charter schools eligible. They could use “the funds to pay for items such as tutoring costs, test preparation courses, exam fees, internet services, and special-needs education,” the American Enterprise Institute’s Ian Rowe and Democrats for Education Reform’s Jorge Elorza argued.

Until the program’s rules-making process is finalized, many governors are likely to be hesitant about committing to participation. According to Education Week, many states will “await federal rules and guidance clarifying the provision” before making a decision on whether to participate. 

To date, only Tennessee Gov. Bill Lee (R) and North Carolina Gov. Josh Stein (D) have clearly announced plans to opt into the program, while Oregon’s Gov. Tina Kotek (D), New Mexico’s Gov. Michelle Lujan Grisham (D), and Wisconsin’s Gov. Tony Evers (D) have said they’ll opt out of it. 

While there is no guarantee that they will participate, based on governors’ public statements and analyses of them by EdChoice and ExcelinEd, it appears that 26 governors support school choice policies, and 14 governors have outright opposed them. Table 1 summarizes the stances of governors on school choice policies nationwide. 

Table 1: Governors’ School Choice Stances, Various Sources

The decision by North Carolina Gov. Josh Stein (D) to opt into the federal tax-credit scholarship program could be a harbinger of what’s to come in state governments that are divided over school choice. When Gov. Stein announced his intention to opt North Carolina into the federal tax-credit program, he also vetoed a state-level proposal that would have established a private school choice program, calling it unnecessary in light of the federal program.

This is because the new federal tax-credit scholarship has created a dilemma for staunch opponents of school choice programs. As the Fordham Institute’s Mike Petrilli explained: 

“Will Democratic leaders opt their states into the new federal school choice program, allowing families to accept scholarships that are funded by charitable donations from taxpayers nationwide—scholarships that don’t cost their state a penny, and therefore can’t be said to be taking any money from their public schools?

Or will they bow to the demands of the teachers’ unions and bar the schoolhouse door instead, creating a grand opportunity for GOP candidates running against them?”

National polling by EdChoice and Morning Consult found that 84% of parents supported school choice policies. Moreover, school choice policies are supported by 78% of Black parents and 83% of Latino parents.

Even if governors choose to opt out of the program, it’s not clear that the buck would stop with them in every case. The federal law states that decisions to participate must be made by a state governor or “by such other individual, agency, or entity as is designated under State law to make such elections on behalf of the State with respect to Federal tax benefits.”

Conflicts are likely to arise when state leaders disagree about who has the authority to opt in or out of the program, especially in states like Arizona, where the governor opposes school choice policies, but state legislators and agencies support them. This could lead to significant jousting between state officials in the years leading up to the program’s launch in 2027. 

However, much of this will be determined by the Department of the Treasury’s rulemaking. Governors typically opposed to school choice could be willing to opt into the program if the agency’s rules let them impose significant regulations on participating private schools or target the funds to students enrolled in public schools.

What to watch

Rep. Virginia Foxx (R-NC) introduced House Resolution (H.R.) 5181, which would reauthorize the D.C. Opportunity Scholarship Program, the federal city’s private school choice program, for another seven years. Since its launch in 2004, more than 12,000 low-income students in the District of Columbia have benefited from the program, receiving scholarships to pay for private school tuition. During the 2025-26 school year, elementary and high school students can receive scholarships valued at up to $10,000 and $15,000, respectively.

The Kentucky State Supreme Court is set to hear arguments this month about whether the state can fund charter schools. Since 2017, charter schools have been legal in Kentucky, but have lacked a funding mechanism. House Bill 9 was passed in 2022, which would let state and local education dollars follow students enrolling in charter schools. However, a Franklin County Circuit Judge ruled the law unconstitutional, stating that it would “establish a separate class of publicly funded but privately controlled schools” and create a “separate and unequal” system.

Laramie County District Judge Peter Froelicher denied the state’s motion to dismiss the lawsuit against Wyoming’s new private school scholarship program. Eligible recipients could use their $7,000 scholarship to cover a range of approved educational expenses, including private school tuition and tutoring.   

Recommended reading 

Risk Sharing: The Student Loan Reform Whose Time Has Come?
Preston Cooper at the American Enterprise Institute

“Requiring institutions to shoulder a portion of student loan risk would realign their incentives. Rather than maximizing student loan volume in any way possible, institutions would seek to disburse student loans only when they have a reasonable expectation that the loan will be repaid. While this would save taxpayers money, the primary beneficiaries would be students, who would face less pressure from institutions to take on debts they cannot afford. Going forward, lawmakers should keep in mind risk sharing as a tool for higher education accountability.”

COVID Worsened Long Decline in 12th-Graders’ Reading, Math Skills
Greg Toppo at The74

“The results, released Tuesday by the U.S. Education Department, are ‘sobering,’ said Matthew Soldner, acting commissioner of the National Center for Education Statistics. He noted ‘significant declines in achievement’ among the lowest-performing students going back even before the pandemic. In one particularly grim indicator, a larger percentage of the Class of 2024 scored in the tests’ ‘below basic’ level in both math and reading than in any previous assessment dating back decades.”

Here Comes “The Big Shrink”
Marguerite Roza, Ph.D., at School Business Now

“Nationally, we can expect a 0.5% decline in enrollment per year. Some districts will be hit much harder. Over the next decade, Los Angeles Unified will lose about a third of its enrollment. None of this should be a surprise. When enrollment is down in the youngest grades, it means there are fewer students in the pipeline. Shrinking is hard. But it doesn’t have to erode systems and hurt students. With a strong plan, leaders can approach shrinking as a path toward a smaller, stronger, more nimble school system that better serves its remaining students.”

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