Last week, the U.S. Department of the Treasury released proposed regulations for the Education Freedom Tax Credit, offering new details about how the program will operate beginning in 2027, but few answers about how, and to what extent, the program could benefit students attending public schools.
Proposed regulations give little power to the state
The Education Freedom Tax Credit (EFTC) is a new federal tax credit created by the Trump administration in 2025. Beginning next year, individuals can receive a federal tax credit of up to $1,700 for qualifying contributions to Scholarship Granting Organizations (SGOs), or up to $3,400 for married couples filing jointly. The Treasury estimates that by 2030, taxpayers could make nearly $26 billion in contributions annually. For context, Title I, the largest federal K-12 education program, is currently funded at about $18 billion annually.
The proposed regulations provide some information about how states and SGOs will participate, but also make clear that states have limited ability to impose requirements beyond those established by federal law. The 30 states that intend to opt in, including North Carolina, are prohibited from imposing operating requirements on SGOs, such as requiring funds be directed to public school students. Additionally, states have no authority to implement mechanisms for addressing waste, fraud, and abuse, academic quality, accountability, or civil rights protections.
How will public school students benefit?
While private school-serving SGOs have everything they need to know in order to move forward to meet the January 2027 start date, public schools still have a lot of unanswered questions. The regulations do not provide clarity on types of qualified elementary and secondary expenses, but they do reiterate that SGOs scholarships for those expenses are tied directly to students, not schools. For example, an SGO could not send a check directly to a public school to purchase new lab equipment for science classes. Private school-serving SGOs, on the other hand, can send scholarship funds directly to private schools for student tuition, fees, room and board, and other similar expenses.
Tutoring is a potential qualified expense for SGOs, which we know can be a highly effective strategy for improving student outcomes. There are examples of other states using public funding mechanisms to make targeted investments in this strategy. Tennessee has embedded tutoring-related funding into its recurring K-12 funding formula, while Louisiana has maintained a $30 million state General Fund appropriation for high-dosage tutoring.
The General Assembly too could choose to invest directly in a similar tutoring strategy and make it available based on student need, rather than relying on private philanthropy to determine where those services are available. Under the EFTC structure which relies on taxpayers choosing which SGOs to support, the availability of resources for public school students could depend, in part, on whether donors and SGOs choose to support those students.
That creates an important equity question. A system that distributes educational resources based partly on where philanthropic contributions are strongest may not distribute resources according to where student need is greatest.
What should public school advocates consider?
As North Carolina moves toward implementation, state and district leaders will need to consider both the opportunities and the tradeoffs. The potential benefit of the EFTC to some public school students should be weighed against the broader question of how North Carolina invests in the students who attend its public schools.
Should public schools build new administrative systems to participate in a program that was not designed specifically for them? How much flexibility will SGOs and public schools actually have to use the funds for public school students? And, perhaps most importantly, does participation expand educational opportunity for public school students, or does it create a pathway for privatizing services that the state should instead fund and provide directly?
Those questions will become increasingly important as North Carolina determines how to implement a program that is already moving forward at the federal level.
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