Federal School Tax Credit Divides Democrats as States Weigh Participation

A new federal education tax credit is prompting disagreements among Democratic leaders, public school advocates and school choice supporters as states decide whether to participate in a scholarship program scheduled to begin in 2027. The initiative allows taxpayers to receive federal tax credits for donations funding K-12 educational expenses, including private school tuition, tutoring and summer programs.

Under the program, individual taxpayers can receive a dollar-for-dollar federal income tax credit of up to $1,700 for qualifying donations to scholarship-granting organizations, or SGOs. Married couples filing jointly can receive up to $3,400, with scholarships available for eligible students in participating states.

Governors must opt in by the end of 2026 for their states' students to qualify for scholarships in 2027. According to reporting by NPR, 31 states had joined the initiative, with Colorado Gov. Jared Polis and New York Gov.

Kathy Hochul the Democratic governors who voluntarily opted in. Washington state Gov. Bob Ferguson remained undecided, while Alaska had already joined under Gov.

Mike Dunleavy.

The program's financial scale and potential effects on public education have become central points of disagreement. The U.S. Treasury Department projects nearly $26 billion in qualifying donations by 2030, while the nonpartisan Joint Committee on Taxation estimates the program will cost approximately $3 billion to $4 billion annually, reaching $25.9 billion by 2034.

The Institute on Taxation and Economic Policy has projected that annual costs could exceed $100 billion even if fewer than half of eligible taxpayers claim the credit. The program's ultimate federal budget impact remains uncertain because the number of taxpayers eligible to claim the credit is unlimited.

Polis has defended Colorado's participation as a way to direct additional educational resources to students. Speaking to NPR, he said, "Of course I want Colorado kids to be the beneficiaries of that."

Polis also described joining the program as straightforward, telling NPR, "I think many other governors would like kids in their state to be the beneficiaries of that." His decision contrasts with Minnesota Gov. Tim Walz, who previously rejected participation, saying, "We are not doing it."

Jessica Levin, litigation director at the Education Law Center, said the initiative places Democratic governors in a difficult political position because they must weigh potential benefits for public school students against concerns about private school subsidies.

Levin warned that the program could encourage families to leave public schools for private institutions, potentially contributing to declining enrollment and funding in public school systems. Critics also question whether scholarship organizations will be required to prioritize students with the greatest financial needs.

Some public education advocates have nevertheless decided to work within the program. Raymond C. Pierce, president and CEO of the Southern Education Foundation, said the organization shifted its focus after the initiative advanced and numerous states committed to participating.

"The question for me became less about whether I agreed with every aspect of the program, because I don't, and more about what happens now that the program is moving forward," Pierce said in a foundation press release.

Fred Jones Jr., the foundation's senior director of public policy and advocacy, said the organization continues to oppose private school vouchers but is establishing an alliance of scholarship-granting organizations to raise money specifically for public school students.

"If we have tutoring, if we have afterschool programming, if we get summer learning… I think a number of students in the public school system could be tremendously better off," Jones said.

In Alaska, the state Department of Education and Early Development approved its first 20 scholarship-granting organizations in October. Only two were Alaska-based: Friends of Spruce Tree Montessori and Alaska Students First. The other 18 were organizations based outside the state.

Caroline Storm, executive director of the Coalition for Education Equity, said the proposed federal regulations do not adequately require scholarships to go to students with the greatest financial needs. She also warned that established organizations from other states could have an advantage in attracting donations because of their larger marketing operations.

"The underlying issue is that public schools do not charge tuition," Storm said. "The majority of the funds will go to private schools, I honestly believe that. I hope I'm wrong, but I don't think I am."

Alaska Education Commissioner Deena Bishop said the initial approvals would allow organizations to prepare for the program. "Donors can begin putting resources behind Alaska's K–12 students," Bishop said in an October 2 statement. "We are excited to see so many organizations stepping forward."

Supporters argue that the program can expand educational opportunities for families who cannot afford alternatives to their assigned public schools. In Washington, U.S. Education Secretary Linda McMahon urged Ferguson to participate during an October 19 visit to a private school in Spokane Valley.

McMahon said, "Every child, regardless of ZIP code or family income, deserves an education that reflects their family's values and prepares them to succeed." Rep. Michael Baumgartner, a Republican from Spokane, also argued that the initiative could help public school students through additional funding for tutoring and after-school programs.

In Anchorage, Anchor Lutheran School already awards up to $500,000 in scholarships annually, according to Lower School Principal Tessa Cushman. More than half of its nearly 350 students receive scholarships, and additional support could help expand career and technical education programs.

"We do not want finances to be a reason why people cannot come to our school," Cushman said. "Anytime you're putting money into education, you are putting money into the future."

Meanwhile, ACE Scholarships, a national nonprofit that supports lower-income families, has launched a nationwide awareness campaign to explain the federal initiative. The organization says it has awarded more than 121,000 scholarships worth over $395 million across 13 states since its founding 26 years ago.

The Department of the Treasury and the Internal Revenue Service estimate that approximately 2 million children could receive annual scholarships of $12,000 each by 2030. The proposed eligibility rules set the household income threshold at three times the area's median income, potentially making approximately 96% of children in participating states eligible to receive scholarships.

Eligibility does not guarantee funding, however. Individual donors choose which scholarship-granting organizations receive contributions, leaving the distribution of money dependent on donor decisions and the organizations' ability to attract support.

For states that decline to participate, residents can still donate to qualifying scholarship organizations and claim the federal tax credit, but students in those states will not qualify for scholarships under the program. Participating governors may also reverse their decisions for subsequent years.