The 119th Congress passed a federal tax credit voucher program in its reconciliation bill in july 2025

 
NCPE memo about the program
 

About the federal tax credit voucher program

Summary

The One Big Beautiful Bill Act, Public Law (P.L.) 119-21, creates a first of its kind program to funnel taxpayer funds into private elementary and secondary schools. Beginning in 2027, any individual can contribute up to $1,700 per year to a “Scholarship Granting Organization” (SGO) and receive a dollar-for-dollar federal tax credit. The donations collected by the SGO could be used to provide “scholarships” or vouchers to students from families who earn up to 300% of the area gross median income. In return, the donating individual receives a tax credit equivalent to the amount donated, which lowers their tax bill. There is no cap on the number of individuals who can claim the tax credit nor a cap on the total amount of tax revenue that can be forgone for this purpose. With the creation of this program, the Federal Government is redirecting revenue that could be used to pay down the national debt or invest in public education, and instead potentially directing tens of billions of dollars annually towards private school education.  

There are very few statutory requirements for a SGO in P.L. 119-21, leaving open many significant questions about the actual design and final implementation of the program. It is likely that these significant and consequential program components will be defined or clarified through the U.S. Department of Treasury’s (Treasury) rulemaking process which will likely begin in 2026. This memo provides an overview of what is currently known about the program based on the statute and what is unknown.

Basic Program Design 

P.L. 119-21 creates a new tax credit program that is primarily geared toward providing vouchers – described in the law as “scholarships” – for eligible students to attend private school. Individual taxpayers, who are citizens or residents of the U.S., can donate cash in return for a tax credit. This is the only federal tax credit that fully reimburses donors for their contribution.

Taxpayers in all states and the District of Columbia (DC) are eligible to utilize this tax credit program, but their contributions must be made to an SGO located in a state that has opted into the program. The opt-in process occurs annually and is decided by the governor or the individual, agency, or entity that under state law can make such a decision on behalf of the state with respect to federal tax benefits.

A SGO’s main responsibility is to provide vouchers, known as “scholarships” in the law, to eligible students, to be used to pay for qualified elementary or secondary education expenses at private or public schools. Additionally, SGOs may accept donations from any citizen or resident of the US, regardless of whether their state of residence participates in the federal program. 

The dollar value of each scholarship and the number of scholarships an eligible student may receive is not specified in the law. Similarly, the law does not specify whether scholarships flow directly to families/eligible students or the schools and other entities where they are being spent. 

Eligible Students 

Eligible students are those who can enroll in a public elementary or secondary school, and whose families earn no more than 300% of the area gross median income (AGMI) in the year before an application for a scholarship is submitted. In some counties, for a family of four, 300% AGMI is $500,000 annually or more. The federal government is prohibited from counting scholarships as taxable income when determining families’ income tax liability. This is regardless of scholarship dollar award amount or annual family income of those eligible.

Qualified Elementary or Secondary Education Expenses

Scholarships can only be used for a “qualified elementary or secondary education expense” which the law defines by citing to this term and its definition in the Coverdell Education Savings Accounts Program. In short, these uses include expenses associated with attending or enrolling in a private (including religiously affiliated schools) or public elementary or secondary school:

  • tuition, fees, room, board, uniforms, transportation, technology, and supplies; 

  • special needs services, tutoring, supplementary items and services (including extended day programs); and

  • additional expenses that are connected to enrollment at a public or private school. 

It is assumed that the intent of this program is to fund private school tuition, including at religious schools. Direct cash transfers for tuition are the “easiest” to execute and many new SGOs will be constructed for that purpose. Regulations by Treasury and/or each state’s operation of the program may clarify its application to public school students.

Scholarship Granting Organizations (SGO): Requirements and Functions

SGOs are responsible for receiving the donations from individuals. An SGO must: 

  • must be a 501c3;

  • must not be a private foundation;

  • must keep funding for the tax credit donations separate from other contributions;

  • must serve 10 or more students in at least two different schools;

  • must take no more than 10% for administrative expenses; 

  • must accurately verify the household income to determine eligible students; and

  • must spend at least 90% of all donations on providing qualified elementary and secondary education expenses. 

To be eligible for this federal program, SGOs must be named on the state-approved list where they operate that is submitted annually to the Treasury Secretary. SGOs can only distribute scholarships in the state where they are located. The law is silent on how many SGOs may operate within a state. 

SGOs must also provide at least 10 scholarships to students who do not all attend the same school (note that if at least two students attend different schools the requirement is met). SGOs must prioritize scholarships to students that had a scholarship in the previous year. If this requirement is met, SGOs must prioritize the siblings of scholarship recipients. 

Any other parameters regarding SGOs will be determined by regulations and/or guidance issued by the Treasury. For example, Treasury may regulate to limit states’ power and oversight over SGOs, which are non-governmental entities, in a manner that limits public school students from benefiting from the program and/or prohibits state reporting and accountability requirements.

Estimated Cost of the National Voucher Program

There is no cap applied to the number of tax credits that can be claimed under this program by taxpayers, nor to the aggregate value of tax revenue sacrificed by this program. The more taxpayers that claim the credit, the less tax revenue the federal government collects.

In fact, the Joint Committee on Taxation has estimated that this program will, over 10 years, add $26 billion to the federal debt. There is enormous uncertainty behind this estimate, however, and the Institute on Taxation and Economic Policy (ITEP) estimates that the true cost could be many times higher than this if private schools and their backers are successful in mobilizing large numbers of individuals to contribute to SGOs. According to ITEP the full cost for the program could range as high as $51 billion annually. In contrast, the federal government spends far less for its two largest discretionary investments in K-12 education - specifically Title I-A of the Elementary and Secondary Education Act ($18.4 billion) and the Individuals with Disabilities Education Act’s state grant program ($14.6 billion). Legislation such as the IDEA Full Funding Act (S.1277, H.R.2598) and Keep our PACT Act (S.343, H.R.869) aims to fully fund these federal education programs but have never been marked up and only S.1277 has bipartisan support.

Next Steps

As aforementioned, the Treasury is responsible for issuing any related regulations, if any, that will apply to the program and will likely do so within the next 6-12 months. These potential regulations could clarify how much or little flexibility states will have—such as directing resources to public schools, prioritizing tax credit donations for high-poverty public school students for uses related to public school enrollment (i.e. tutoring or enrichment), establishing accountability measures, providing civil rights protections, and tailoring programs to local needs. If a State chooses to opt into the federal tax credit program, it must create a list of SGOs that are eligible to receive donations for federal tax credits in the state and make that list available by January 1, 2027. Donations can begin to be received starting on January 1, 2027 and taxpayers are eligible to receive the federal tax credit when they file their 2027 federal income tax returns. It is unknown if SGOs will begin to distribute the money they receive immediately in January 2027 or use it for the 2027-2028 school year. 

Public education advocates trying to decipher whether this program may benefit supports for public school students, must weigh the political and policy risks and benefits of encouraging their state to opt-in or opt-out of the federal tax credit program at a time when so little is known. In the 20 states without existing voucher programs, advocates should be particularly wary of opting in. In particular, it behooves all states to wait until Treasury finalizes regulations that clarify how much flexibility states will have—such as directing resources to public schools, prioritizing tax credit donations for high-poverty public school students, establishing accountability measures, providing civil rights protections, and tailoring programs to local needs—before determining whether to opt into the program.