While the “government shutdown” is nearing its end, this 40-plus-day experience reminds us of the limitations of the federal government in policymaking and leadership.
This is ever true in education policy. Many education choice advocates celebrated when Congress passed the One Big Beautiful Bill’s federal tax-credit scholarship, which could significantly amplify education choice in states to the benefit of millions of children. But the passage of this policy also raises legitimate questions, especially about its ongoing impact on federalism.
The piece below examines both the legitimate questions and challenges that remain with the federal tax credit scholarship, as well as the unique opportunities for states and parents that it presents.
What are the basic facts about the federal tax credit scholarship?
The federal tax credit scholarship was passed this July as part of the One Big Beautiful Bill, the result of the budget reconciliation process. The new policy allows individuals to claim a non-refundable tax credit (up to $1,700) when they donate to qualifying scholarship-granting organizations (SGOs). These SGOs then provide scholarships to students who can use them to pay for a personalized education. This policy is a way to fund more of these scholarships in states with or without a state-funded education choice program.
These scholarships can be used in flexible ways that allow families to personalize education for their students in public, private, or religious schools through “qualifying expenses” like tuition, fees, educational materials, tutoring, services, and more (the same as Coverdell Education Savings Account). SGOs may then offer scholarships to students who fall within 300% of the area’s median income, thereby providing broad student eligibility.
Individual states are not required to participate but can choose to opt in starting in 2027. Thereafter, they must annually opt in to continue in the program. If they do, governors (or the appropriate state entity) must provide the U.S. Secretary of the Treasury with a list of eligible SGOs.
The program and its forthcoming regulations reside with the U.S. Department of the Treasury rather than the U.S. Department of Education.
Does the federal tax credit scholarship honor federalism?
Federalism is the principle that some issues belong to the federal government, while others belong to the state governments. Education is a matter for the states.
Therefore, the less the federal government involves itself with education policy, the better. That is something most education choice advocates believe, and reducing federal influence in education was one of the president’s campaign promises. Which begs the question, does this new federal tax program cause federalism concerns?
On the one hand, one could argue that it respects this delicate principle because the program is primarily a tax policy, not an education policy, and avoids mandating anything on the states. States are still in charge of deciding substantive education policies, such as their own academic standards, curriculum, tests, and more. Their state legislatures can still choose whether to adopt a state education choice policy. And ultimately, states can decide whether to opt in to the federal program at all.
On the other hand, tax policy is often used to advance other substantive policy areas. Using it to advance education choice as a way around this limitation does not mean it’s cured of its constitutional question.
To start, since the regulatory details have yet to be ironed out, questions have been raised about the relationship between the federal law and state decision-makers, such as whether states may add requirements for SGO eligibility beyond those stated in the federal law.
Another recent discussion between pro-education choice scholars highlights questions about how a new administration could alter or enforce the program in the future, and even how it might impact private schools’ admissions in the long run. This threat, in particular, may cast the biggest shadow on what could otherwise be seen as a win for education choice and state autonomy as well.
Other education choice advocates have been warning that federal tax credit scholarships may expand – rather than reduce – federal involvement in education, complicate the tax code, and even spark a nationwide backlash against education choice. The latter is what happened after the federal push to adopt the Common Core. Where states have won significant ground culturally and legislatively, this could pose a serious risk.
These questions and more are relevant because they possibly impact the delicate power balance required by federalism.
How can states and parents use this opportunity?
Even if the federalism question is not yet settled, the policy will go into effect in a little over a year. States should consider how to participate in the regulatory build-up and how to achieve the best outcomes when opting in. Parents should continue to advance the culture of choice in their states.
Starting now, states can take a few steps to prepare, including becoming aware of the federal regulatory process to provide public input that helps answer these questions in favor of state autonomy. Specifically, one scholar argues for seeking maximum state flexibility and autonomy over programs in their state.
If states decide to opt in, they should also educate the public about the opportunity for individuals to claim a tax credit for donating to these SGOs and about the growing opportunity to seek out scholarships from these SGOs for a personalized education so it can thrive.
Parents can do their part by giving public comment or by speaking to their state and federal representatives about what they want the program to do, as these leaders provide input. Suppose the federal program begins to weaken state choice programs, impact private school admissions, or harm education choice generally. In that case, parents should use their voice to influence state leaders to change course. Because states must opt in each year, it might be possible to remedy this issue more quickly than usual.
Importantly, parents are the key agents of cultural change. As they seek new educational options, they create demand that innovators can supply. SGOs are as much a result of the donations they receive as they are the demand from parents seeking education choices for their students. Parents should continue their pursuit of finding the best options for their children’s education and demanding the most parent-friendly policies to achieve this.
Conclusion
There are high hopes, apprehensions, and at the very least, questions about how the federal tax credit program will expand education choice among the states. The litmus test for whether this new policy accomplishes its goal of expanding education choice in states may be how well it honors federalism.
