How States Use Tax Credits to Fund Private School Choice

By Mark Lieberman
Education Week, Bethesda, Md.
(TNS)

Most of the biggest recent developments in the world of private school choice have centered around education savings accounts, a twist on the private school voucher that parents can spend on tuition, fees, and a wide range of other costs tied to their students’ learning outside the traditional public school system.

But close to two dozen states also operate smaller-scale private school choice programs that rarely draw attention on the same scale. These programs, known broadly as “tax-credit scholarships,” typically target smaller populations of students and offer fewer dollars per child than vouchers and ESAs.

“They seek to accomplish the same thing that school vouchers do, but without the direct government funding,” said Patrick Wolf, a professor of education policy and school choice at the University of Arkansas.

These programs are relatively small compared with voucher and ESA programs, some of which are opening eligibility to all students in their state. Still, states have annually doled out hundreds of millions of dollars in tax credits over the life of these programs.

What is a tax-credit scholarship program?

A tax-credit scholarship program offers funds from private donors for families to spend on private school tuition, just like vouchers and ESAs.

But unlike those two higher-profile forms of private school choice, the public funds involved in tax-credit scholarship programs don’t flow directly from state coffers to parents.

Instead, individuals and corporations donate to nonprofits known as “scholarship-granting organizations,” which pool those funds and give them out to eligible student applicants in the form of scholarships.

The individuals and corporations that donate to scholarship-granting organizations then receive a state tax credit for as little as half or as much as 100 percent of their donation, depending on the state and whether the amount of the scholarship is a significant percentage of their overall tax liability.

Are all tax-credit scholarship programs designed the same?

No. Traditional tax-credit scholarships provide families with funds to spend on private school tuition. Two other types of programs that use tax credits to subsidize private education expenses have cropped up more recently.

Florida and Missouri have tax-credit education savings account programs. When individuals and corporations donate to scholarship-granting organizations, they receive a tax credit in return. But instead of parents getting scholarships from those donated funds that they can only use at private schools, they get access to education savings account funds that can be spent on a wide range of private education expenses.

Some states use tax credits to offer more direct fiscal relief to families who opt for private education. Oklahoma has the most generous program of this sort, offering tax credits of up to $7,500 directly to families whose children attend private school.

Even tax-credit scholarship programs with the same basic structure have different requirements. A 2019 report from the Government Accountability Office, a federal watchdog, found that programs differ widely on whether they require students to take standardized tests; which qualifications teachers at participating private schools are required to have; and whether schools are subject to annual audits.

Which states have tax-credit scholarships?

Twenty-one states currently have tax-credit scholarship programs, according to Education Week’s private school choice tracker, making it the most common form of private school choice program.

Arizona and Florida established the first tax-credit scholarship programs, which each continue to enroll more students than any other tax-credit scholarship programs nationwide.

In some states—including Kansas, Nevada, and Rhode Island—they’re the only form of private school choice the state offers parents. In others—including Georgia, Montana, and Ohio—they’re one of several private school choice programs.

Illinois had one from 2017 to 2023, when it became the only state ever to let a private school choice program expire.

How did these programs come about?

Arizona established its Original Individual Tax Credit Scholarship program in 1997, two decades before the post-pandemic surge in education savings account programs that is still in progress in conservative-led states.

State lawmakers who supported private school choice wanted to develop a program that wouldn’t face the same legal obstacles as vouchers.

Many states, such as Arizona, have constitutional provisions known as Blaine amendments, which directly prohibit spending public funds on religious education. (Most private school students in the United States attend religiously affiliated schools.)

The tax-credit scholarship model appeared likely to face fewer constitutional hurdles because it didn’t represent a direct allocation of funds from the state to private education, said Luis Huerta, a professor of education and public policy at Columbia University Teacher’s College who has extensively studied tax-credit scholarships over the last two decades.

What are scholarship-granting organizations?

Scholarship-granting organizations are nonprofits that collect donations from individuals and corporations and then use that money to fund scholarships for students to attend private schools.

Some states have just a small handful of scholarship-granting organizations competing for applications from students, while others have more than a dozen.

Some of these organizations cropped up after states established their tax-credit scholarship programs. Others previously existed in a different form. In Arkansas, for example, the Ace Foundation offered scholarships funded solely with philanthropic donations until the state began offering tax credits to donors in 2021.

Some scholarship-granting organizations, like Step Up for Students in Florida, operate in a single state. Others, like the Ace Foundation, offer scholarships in several states.

These groups typically have a lot of discretion over which students receive scholarships, at which schools students can spend scholarship funds, and how much money each student gets for a scholarship, according to Huerta.

“These are fairly unregulated organizations, with the exception of some states that would prohibit them from profiting,” Huerta said.

Who donates to these programs?

States don’t make it easy to find out. But some reports have emerged over the years.

The news organization Scripps published a list of corporate donors to the Pennsylvania tax-credit scholarship program that included small businesses as well as major corporations like Comcast, PNC Bank, and Cigna Health.

Meanwhile, in Missouri, the biggest donors to the tax-credit ESA program enacted in 2022 were a Fortune 500 health care company, and family members of the owners of the Kansas City Chiefs, the Missouri Independent reported in July.

How many students use these programs?

The number of students enrolled in tax-credit scholarship programs grew every year from 1998 to 2021, when the number of recipients nationwide came in just above 320,000, according to EdChoice, the leading nonprofit advocacy group pushing for school choice nationwide.

The number dropped by 23,000 in 2022, then spiked again to a record high of 321,000 in 2023.

In 2024, the number dropped lower than in any year since 2016. Roughly 247,000 students received tax-credit scholarships in 2024.

That decrease can likely be attributed to the introduction of Arizona’s universal education savings account program. Many students reportedly migrated from the tax-credit program to the ESA, which families can spend on a wider range of expenses. Students can’t receive funds from both programs.

At no point have tax-credit scholarship recipients ever made up 1 percent of all K-12 students in the United States, though in some states more than 1 percent of students received one. These programs have remained largely under-the-radar for the entirety of their existence.

How much do these programs cost?

Arizona alone spent more than $1 billion between 2008 and 2019 on tax credits for donors to organizations that support private school scholarships, according to state data compiled by the advocacy group Public Funds Public Schools. By comparison, the state spends between $4 billion and $5 billion annually on public education.

Advocates like EdChoice and the Commonwealth Foundation argue these programs represent a net positive for states because the state doesn’t have to pay the full per-pupil amount afforded to public schools when students switch to private schools on tax-credit scholarships.

Others dispute that analysis. Most of states’ savings would come when students leave public schools and attend private school with the help of a tax-credit scholarship, which is typically thousands of dollars less than what the state pays per pupil to public school districts.

But in many states, it’s impossible to know for sure how many students on tax-credit scholarships are “switchers” from public schools and how many have been in private school the whole time and would have been even without the scholarship made possible by state-funded tax credits to donors, Huerta said. The latter group creates a new expense for states.

“Any claims of having these enormous savings were based on estimations that weren’t fully accounting for the number of kids who weren’t switchers,” Huerta said.

What is the purpose of these programs?

Proponents of private school choice say students—particularly those from low-income families and/or with disabilities—deserve state support for whichever education option their parents believe works best for them.

Relatively few research studies have examined the effectiveness of programs that serve students on tax-credit scholarships, Wolf said. One study found small positive effects on reading and math scores for public school students in Florida after the arrival of tax-credit scholarships introduced more competition into the education landscape there. Another found that students who attended Florida private schools using a tax-credit scholarship were more likely to graduate, and to enroll in Florida colleges, than their public school counterparts.

Most tax-credit scholarship programs are targeted to low-income students from families earning below 150, 200, or 300 percent of the federal poverty line, or to students with disabilities.

There are exceptions, though. Arizona, Montana, and Ohio have tax-credit scholarship programs that are open to all of the state’s students. Georgia allows any student who had attended public school for at least six weeks to apply, as well as students entering pre-K or kindergarten. In Indiana and Iowa, anyone in a family earning 400 percent of the federal poverty line or less can apply—a substantial portion of the state’s residents.

They’re designed to provide a boost to students looking for alternatives to the public school system whose families lack the means to pay entirely on their own.

Private schools like them, as compared with vouchers and ESAs, because regulations are less stringent, and because the funding the schools receive is coming from individuals and private companies rather than from governments aiming to limit their autonomy, Wolf said.

How much money do students get from these programs?

In general, these programs are orders of magnitude less lucrative for families than vouchers and education savings accounts.

Most tax-credit scholarships students receive through these programs range from $1,500 to $2,500 per student, Wolf said. In Pennsylvania, the average per-student amount could be as low as $1,150.

Education savings accounts tend to be equivalent to, or close to, the per-pupil amount the state spends on public schools.

What kinds of controversies have these programs sparked?

As often happens with complicated tax policy, some researchers have pointed out loopholes that allow individuals and corporations to generate a personal profit from the existence of these programs.

In 2016, the left-leaning Institute on Taxation and Economic Policy published a paper showing that some individuals and corporations could donate to scholarship-granting organizations, collect a state tax credit to offset their donation, and then secure additional tax relief on their federal returns in the form of a deduction for charitable contributions.

Some organizations even marketed the tax credits as an opportunity for double-dipping on benefits, according to the tax policy report. All told, corporations in particular could generate tens of thousands of dollars in profit from such schemes, which were legal at the time. The IRS has since moved to ban that practice.

But Carl Davis, the Institute on Taxation and Economic Policy’s research director, believes many tax-credit scholarship programs still leave room for similar manipulation.

Corporations can write off donations to tax-credit scholarships as business expenses for which they receive deductions.

And in certain states, individuals and corporations can donate stock shares instead of cash to scholarship-granting organizations. According to Davis, they’ll receive a tax credit worth the full value of the stock, and they won’t have to pay capital gains taxes they otherwise would on the profit they earned from the growth of the stock.

These loopholes represent just one way that tax-credit scholarships differ greatly from states’ traditional approaches to offering tax benefits to residents, Davis said.

“In tax policy, it is very common for there to be tax incentives to give money to some particular nonprofit group,” Davis said. “The thing is, the tax incentive at the state level is usually 5 or 10 cents on the dollar.”

Most private school choice tax credits are worth at least 50 cents on the dollar, and many are dollar for dollar.

Will more states adopt these programs in the future?

Longtime observers of the private school choice movement believe the push for tax-credit scholarships is waning, in favor of a bigger focus on vouchers and ESAs. The latter offer more money to families and more flexibility on how they can be spent.

“It was that middle stepping stone towards the universal programs that we’re now seeing in the ESAs,” Huerta said.

Even so, federal lawmakers haven’t completely lost interest. The House Ways and Means Committee recently advanced a proposal to offer federal tax credits nationwide for donors to scholarship-granting organizations that support private school students. Project 2025, the conservative federal policy agenda crafted in large part by allies of GOP presidential nominee Donald Trump and officials from his first administration, calls for a nationwide federal tax-credit scholarship policy as well.

The capital gains loophole Davis has pointed out would be a feature of the proposal as currently written.

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