California Gov. Gavin Newsom is running out of time to decide whether the state will join a new federal program that lets taxpayers claim a dollar-for-dollar credit for donations to scholarship-granting organizations. States have until Jan. 1 to opt into the Federal Scholarship Tax Credit, and California remains undecided even as 31 states have already signed on.
The program, formally called the Education Freedom Tax Credit, was created through the One Big Beautiful Bill Act, signed into law last year, according to a report in the San Mateo Daily Journal. Beginning Jan. 1, 2027, individual taxpayers will be able to claim a federal credit of up to $1,700 for contributions to qualifying scholarship-granting organizations, or up to $3,400 for married couples filing jointly, according to the Internal Revenue Service. In exchange, the taxpayer receives a federal tax credit equal to the donation amount, effectively letting them redirect money that would otherwise go to the U.S. Treasury.
States that opt in must give the IRS a list of eligible scholarship-granting organizations located within their borders, per the U.S. Department of the Treasury. Beyond submitting that list, governors have limited authority: they can decide whether funds go to public or private schools, whether they serve elementary or high school students, and what scholarship amounts or public-school programs are supported, but they cannot add their own accountability provisions or favor some scholarship organizations over others, according to the San Mateo Daily Journal.
Who Qualifies and What the Money Can Pay For
Students in families earning up to 300% of an area's median income will be eligible for scholarships, according to EdSource. The American Federation for Children projects that 51.7 million children could qualify nationally, representing roughly 90 percent of public and private school students, per the San Mateo Daily Journal.
Scholarship-granting organizations can distribute funds for private-school tuition as well as tutoring, summer school and even new computers, according to NPR. Public-school students specifically can use the scholarships for activities such as tutoring and before- and after-school programming, according to the same NPR report cited by the San Mateo Daily Journal's reporting on the program. Public schools and school districts themselves, however, cannot be direct recipients of program funds because the money must flow through the scholarship-granting organizations, per the Learning Policy Institute.
Those organizations must use at least 90% of their income for scholarships serving at least 10 eligible K-12 students, and they must check students' income eligibility and audit the money, per the San Mateo Daily Journal's account. But the organizations are not required to monitor programs or maintain school achievement records, and private schools receiving program funds are not required to give students the same statewide math and reading tests required of public schools receiving federal ESEA funding, according to the Learning Policy Institute.
Only Two Blue-State Governors Have Signed On So Far
Thirty-one states have opted into the program, but that number includes only two Democratic-led ones: Colorado and New York, as reported by The Hill. New York Gov. Kathy Hochul said she would not leave money on the table when it could help children, according to the San Mateo Daily Journal. Virginia joined the program before Democratic Gov. Abigail Spanberger took office, per the same report. Oregon Gov. Tina Kotek has said her state would definitely not opt in, The Hill reported.
Fifteen Democratic governors, as well as the mayor of Washington, D.C., remain undecided, according to an Education Week tracker cited by NPR. Evan Marwell, a San Francisco nonprofit entrepreneur who founded EducationSuperhighway and co-founded the early-grades online tutoring service Ignite Reading, said he reached out to 45 governors and expects Democratic states will opt in once they see Colorado and New York's results, according to the San Mateo Daily Journal. Marwell is rechartering EducationSuperhighway as a national scholarship-granting organization, the paper reported.
California's Own Ban on Funding Private Schools
California bans use of state funding for private and religious schools, which complicates Newsom's calculus, the San Mateo Daily Journal reported. Thirty-one states have already opted in, while California is still considering participation. The program is funded entirely by private donations rather than state dollars, which advocates argue sidesteps that restriction. If Newsom opts out, California taxpayers could still donate to out-of-state scholarship-granting organizations and claim the federal credit, but none of that money would flow back into California, according to the paper's reporting.
Lance Christensen, vice president of tax policy and government relations at the California Policy Center, called the Brookings Institution's analysis of the program shortsighted, per the San Mateo Daily Journal. California public schools have faced declining enrollment, according to the California Policy Center.
The San Mateo Daily Journal reported that 100,000 California donors giving the $1,700 maximum could generate $170 million, while one million contributions of $1,700 each would total $1.7 billion.
Fraud Fears Echo an Earlier Federal Program
Thomas Toch, founding director of FutureEd at Georgetown University, said Congress should have learned from the No Child Left Behind Act of 2001, which provided billions of dollars for tutoring in low-performing schools but relied on contract tutors who were often unvetted, inexperienced and unmonitored, according to the San Mateo Daily Journal. The Education Department's inspector general later found widespread fraud, falsified records, conflicts of interest and deceptive marketing tied to that effort, the paper reported.
Jon Valant, director of the Brookings Center on Education Policy, wrote that the new program could become a large source of waste, fraud and abuse, according to the Brookings Institution. Brookings also found that counties in the top decile of median income have almost twice as much potential money available per pupil, $3,859, as counties in the bottom decile, at $2,233, according to a separate Brookings Institution analysis, which concluded the donor credit is highly likely to be claimed disproportionately by wealthy individuals in wealthy communities.
Advocates See Opportunity for Existing Scholarship Groups
Some Bay Area nonprofits say they are positioned to benefit regardless of how the fight over fraud and equity plays out. The BASIC Fund, a scholarship organization serving students at 266 Catholic and nonreligious schools in the Bay Area, could capitalize on the tax credit by expanding its donor base, according to the San Mateo Daily Journal. Rachel Elginsmith, chief executive of the BASIC Fund in Oakland, noted the organization has distributed $200 million in partial scholarships since its 1998 founding, supporting 30,000 students from preschool through eighth grade, per that report.
Marguerite Roza, director of Georgetown University's Edunomics Lab, predicted public schools could become the program's biggest beneficiaries once districts figure out how to use it, the San Mateo Daily Journal reported. Republicans included public schools in the law, and program advocates promise it will increase full or partial scholarships to private and religious schools while also boosting tuition assistance for families in states with existing voucher programs.
Unions and Critics Push Back
The National Education Association has said taxpayer dollars should go to public schools open to all students, according to the San Mateo Daily Journal, and California teachers unions are expected to oppose Newsom if he signs on to the program.
Critics more broadly describe the program as a Trojan horse for privatization, arguing it will primarily subsidize existing private-school parents rather than help low-income families, and that its free-market focus and limited oversight could reinforce inequities and enable abuse, according to the San Mateo Daily Journal. Opponents argue the program is ultimately a tactic to undermine public schools. Newsom, for his part, faces a political bind either way: opting out could draw criticism for denying low-income families money that might close the achievement gap, while opting in could force California taxpayers' donations into a system unions oppose. The governor has not signaled which way he will go, according to the paper's report.
