Federal Tax Credit for Education: Part1 - Who Is Benefiting?

Introduction

On July 4, Congress passed the One Big Beautiful Bill Act, launching a federal education tax credit that’s being hailed as a win for school choice. But beneath the patriotic branding lies a permanent, uncapped tax shelter for donors—not students. This isn’t just a policy shift, it’s a seismic reallocation of public dollars toward private interests.

In this first installment, we unpack who stands to gain from the new law—and why the biggest winners aren’t families or students, but corporations, religious institutions, and wealthy donors.

What's New - and What's Not

On July 4, 2025, Congress passed the One Big Beautiful Bill Act, creating a federal education tax credit that allows individuals and corporations to receive a dollar-for-dollar reimbursement for donations to Scholarship Granting Organizations (SGOs). This credit is permanent, uncapped, and available only in states that choose to opt in to the program.

This is the first federal tax credit that offers full dollar-for-dollar reimbursement, no other charitable cause receives this level of taxpayer subsidy.

The effective date of the tax credit for SGO contributions applies to tax year 2027.

How It Works

The federal education tax credit allows:

• Individuals may claim up to $1,700 per year in non-refundable federal tax credits for donations to approved SGOs. While the bill does not explicitly mention it, there is an expectation that this amount could double to $3,400 for couples filing jointly.

• Corporations may participate, with credit limits subject to future IRS guidance. While the legislation doesn’t specify a corporate cap, the IRS is expected to issue regulations that could open the door to generous treatment of corporate donations. This could include multi-year carryforwards and potential deductions.

• Donations must be cash-only—no stock or property.

• The credit cannot be combined with a charitable deduction or a state-level credit for the same donation.

• Unused credit amounts may be carried forward for up to five years, which could make this a strategic tax planning tool for corporations.

• SGOs must operate in-state, and donors can only claim credits in states that opt in.

This structure creates a powerful incentive for corporations to participate—not necessarily to expand educational access, but to optimize tax liability. With the IRS expected to clarify implementation details, there’s concern that this program could become a boon for corporate donors, especially in states with minimal oversight.

Loss of Federal Revenue

Because congress left the program uncapped, that is without a “high watermark” for spending, it is difficult to anticipate the cost for the tax credit. Congressional estimates are $3 - $4 billion/year. But the Institute on Taxation and Economic Policy (ITEP) warns that those may be overoptimistic.

According to the ITEP, the cost to taxpayers will be staggering if there is early participation and aggressive donor behavior.

• 2026: • $10 billion in lost federal revenue from the credit • $469 million from capital gains tax avoidance • Total for 2026: $10.5 billion (Note: ITEP uses 2026 as a modeling baseline to estimate fiscal impact, even though the credit applies to donations made in tax year 2027. You can also see a more modest ITEP estimate for the first year in the Sources & Further Reading sections)

• 2026–2036: • $134 billion in lost revenue from the credit • $8.2 billion from capital gains avoidance • Total over 10 years: $142.2 billion

This is money that could fund public schools, teacher salaries, and student support services. Instead, it’s underwriting private tuition—often at religious schools—with no academic accountability.

What makes this program especially extraordinary is its dollar-for dollar reimbursement. The ITEP wrote “There is no other cause – not children’s hospitals, veterans’ groups, or disaster relief – that taxpayers can contribute to and see the entire cost of their contribution bankrolled by the federal government.” This is a tax shelter unlike any other – and it’s permanent.

Oversight and the Religious Tilt

Beyond the financial cost, the program’s design raises fundamental questions about oversight, equity, and the role of religious institutions.

To participate, donations must go to state-approved SGOs who meet certain criteria:

• 501(C)(3) nonprofits (not private foundations).

• Must allocate at least 90% of funds to scholarships.

• Must serve at least 10 students across two schools.

• Must verify family and ensure funds aren’t directed to disqualified people.

• Can’t earmark funds for specific students.

• Must prioritize returning students and siblings of current recipients.

The use of SGOs in the new federal education tax credit program doesn’t explicitly require a religious affiliation but in practice, it often leans that way. The use of the SGO as the scholarship distribution entity calls out church-state concerns and blurs the line between public funding and religious instruction. And the secular private schools and public-school supports may be underrepresented in SGO networks, depending on the state.

Here's why religious schools are poised to benefit under this new law.

• Many SGOs are affiliated with religious institutions.

• Religious schools make up a generous portion of the private school landscape, particularly in rural or underserved areas.

• Faith-based organizations often have existing infrastructure for scholarship distribution, making them early adopters of programs like the federal education tax credit.

Interestingly, unlike most state voucher laws, this federal program does not include “hands-off” language that shields private and religious schools from oversight. In fact, the Treasury Department is authorized to regulate SGOs and potentially the schools they fund. That’s a major shift from the typical voucher model, where taxpayer dollars often flow with little accountability.

Tax Shelters in the Name of School Choice

The federal education tax credit is a masterclass in upside—for donors. But what about the students? What happens when public dollars are diverted to private schools with no guarantee of access, equity, or accountability?

In Part 2, we’ll explore who loses under this new regime—families left behind, public schools underfunded, and states caught between values and federal dollars. Will Arizona and other states stand up for public education, or will they let federal dollars deepen inequality?

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Sources & Further Reading

Legislative & Technical Details

Bonadio Group: Section 70411 of the OBBBA – Clear breakdown of the federal tax credit’s structure, eligibility, and implementation timeline. 

NCEA Talk: The Educational Choice for Children Act (ECCA) – Advocacy perspective on how the federal credit could expand religious school enrollment.

Fiscal Impact & Policy Critique

Institute on Taxation and Economic Policy (ITEP) – In-depth analysis of projected federal revenue losses, tax shelter risks, and equity concerns.

Yahoo News Opinion: State Voucher Programs Signal Pitfalls – Comparative insights from state-level voucher programs and their implications for federal policy.