Newsom’s dilemma: Join or spurn new federal school choice program

Before he heads out the door, Gov. Gavin Newsom must decide whether California will join 31 states in a new multibillion-dollar school choice program, funded by private donations, that President Donald Trump included last year in his One Big Beautiful Bill.

Like most Democratic governors, Newsom hasn’t signaled whether he’ll opt in to the law that advocates promise will greatly increase full or partial scholarships to private and religious schools, while potentially paying for auxiliary services in public schools, like tutoring.

The law’s intentionally broad, unrestricted language has made it contentious, with contrasting scenarios for how the Federal Scholarship Tax Credit program, also called the Education Freedom Tax Credit, will play out.

Under the program, an individual taxpayer can donate up to $1,700 annually to a qualifying grant-making organization, up to $3,400 for couples, and then receive a federal tax credit that lowers their taxes by the full amount. The nonprofit “scholarship-granting organizations” then combine individuals’ donations and distribute the money to school districts or to eligible families for private schools.

Advocates say federal tax credits will boost tuition assistance for families in voucher states, while introducing school choice in states like California, which bans using state funding for private and religious schools.

Although it was not their main intent, Republicans included public schools in the law. One nonpartisan analyst, Marguerite Roza, director of the Edunomics Lab at Georgetown University, predicts that public schools will eventually become the biggest beneficiary, once they figure out how to tap into it.

“Given that anyone and everyone can donate without it costing them, it’s like a cost-free donation. We think the average taxpayer is going to lean toward donating to a [grant maker] that serves public schools.”

But opponents argue the program is a tactic to undermine public schools, which are already facing declining enrollments in blue states that have historically opposed voucher-like programs. One critic characterized the program as “a Trojan horse designed to bring the chaos of privatization into Democratic strongholds.”

Others say the program will primarily subsidize existing private school parents, not help low-income families trapped in their neighborhood schools. And the law’s free-market focus, its lack of oversight and failure to require civil rights protections will reinforce inequities and lead to abuse.

“The FSTC will become the largest source of waste, fraud and abuse we’ve seen in education — and most of it will be legal,” wrote Jon Valant, the director of Brown Center on Education Policy at Brookings.

Congress’ hands-off policy

Valant and other critics blame Congress for tying governors’ hands. Under the law, governors cannot add accountability provisions or favor some scholarship-granting organizations, called SGOs, over others, such as those that give to public schools. Once they opt in and submit a list of all SGOs, their job is done.

SGOs must check students’ income eligibility and audit the money, but they’re not required to monitor programs or keep school achievement records.

Thomas Toch, founding director of FutureEd, an independent education policy institute at Georgetown University, said Congress should have learned from the No Child Left Behind Act of 2001. The law provided billions of dollars for parents in low-performing schools to obtain tutoring from contractors who were often unvetted, inexperienced and unmonitored. The Education Department’s inspector general found widespread fraud, falsified records, conflicts of interest and deceptive marketing.

“Sounds familiar,” Toch said.

Governors can’t tell the SGOs which students to serve, but SGOs can determine where to funnel dollars — to a public or private school, an elementary or high school, only to parochial school students or for specific programs. They’ll determine the scholarship amounts and the public school programs they’ll support.

There will be a wide universe of students to serve.

Students in families earning up to 300% of an area’s median income will be eligible — more than $400,000 in some wealthy Californian cities. Some donors may give to SGOs committed to services and scholarships for low-income children, but others may not.

The American Federation for Children, a proponent of the tax credit, projects that 51.7 million children — 90% of the total public and private school students — will be eligible for the benefits.

Based on an analysis of donors to a similar tax credit program in Ohio, Brookings predicts that more tax-credit program money will end up in wealthy communities. “We expect the FSTC to become a regressive funding source, even where those funds go to public school students.”

Lance Christensen, who has drafted school choice proposals as vice president of tax policy and government relations for the conservative California Policy Center, says the Brookings analysis is “shortsighted.” If 100,000 people — not even 1% of California’s 17 million income tax filers — donated $1,700, it would generate $170 million, he said. That amount would rise to $1.7 billion if one million taxpayers — only 6% of the state total — gave the maximum.

“You’re talking about real money that could impact the way that parents legitimately think about their kids’ education,” Christensen said. “We have a lot of kids right now that are stuck in a system that doesn’t work for them and hasn’t worked for them for a long time, and the parents are just really frustrated.”

The Treasury Department and the IRS estimate that, by 2030, more than 11 million taxpayers will contribute $26 billion for scholarships and other grants.

Two visions for California donations

So far, New York Gov. Kathy Hochul and Colorado Gov. Jared Polis are the only Democratic governors among the 31 participating states to opt in. (Virginia joined before Democratic Gov. Abigail Spanberger took office.) This year’s opt-in deadline is Jan. 1.

Two Californians who hope for different reasons that Newsom will sign on are Rachel Elginsmith and Evan Marwell.

Elginsmith is chief executive of the BASIC Fund in Oakland, the state’s largest nonsectarian SGO. Since its founding in 1998, it has distributed $200 million in partial scholarships for 30,000 students, from preschool to eighth grade attending 266 Catholic and nonreligious schools in the Bay Area.

The BASIC Fund would be well positioned to capitalize on the tax-credit by expanding its base of donors. “It would be more money, more kids, bigger scholarships — more of what we’re doing. It would be exciting,” she said.

Marwell, a San Francisco nonprofit entrepreneur, founded EducationSuperHighway, which helped districts plan and fund high-speed internet during the pandemic, and then co-founded Ignite Reading, an online tutoring for the early grades. His new mission: rechartering the EducationSuperHighway into a national SGO that will compete for taxpayers who want to choose first grade tutoring in reading for their tax credit donation.

Marwell said he has reached out to 45 governors, and expects that Democratic states will opt in. They will see the success of Colorado and New York, he said, and “they will start to hear from voters, ‘Why the heck are you not allowing our kids to get these scholarships that we’re contributing to?’ ” 

Newsom’s dilemma

Newsom will get grief whether he opts in or out. The National Education Association and teachers unions in California will thrash him if he signs on. “Taxpayer dollars should go to public schools open to all students, not private schools that can pick and choose their students,” the NEA said in a press release.

If he doesn’t opt in, he’ll be criticized for denying low-income families money to close the achievement gap, while forcing California taxpayers to give to out-of-state SGOs. As New York Gov. Hochul said in her Oct. 9 announcement, “I’m not going to leave money on the table when it could help our kids.”

There is a third option — do nothing, citing fatal flaws in the tax credit program’s design. That’s the advice of Rachel Cantor, director of education policy at the Progressive Policy Institute.

“If I was advising a Democratic governor, I would say, ‘No, don’t opt in. Expand public school choice in your state so that people do have choices. But this is a risky way to do it if your goal is to improve educational quality and open opportunity for people who don’t have it.’ ”

What we know about Trump’s Federal Scholarship Tax Credit program

Gov. Gavin Newsom must decide whether California will join 31 other states in participating in President Donald Trump’s school choice program. Here is how the program works: 

• Governors must opt in by Jan. 1 annually to participate in the program.
• Federal income tax filers, whether living in a participating state or not, can receive a tax credit of up to $1,700 ($3,400 for couples) by donating to a state-approved Scholarship Granting Organization (SGO).
• Governors cannot determine which organizations can serve as SGOs, beyond requiring 501(c) (3) nonprofit status and compliance with state nonprofit laws.
• SGOs certify scholarship recipients; the family income of recipients must be below 300% of the median income in the counties they live in (more than $400,000 in wealthy counties).
• SGOs determine the size of scholarships and grants and where the money they collect can be spent; they must spend 90% of the money they collect on scholarships and grants.
• The FSTC law does not require academic reporting and accountability requirements of private schools receiving program funds.
• Private school scholarships can cover tuition, fees, uniforms, books, technology, transportation and certain room-and-board costs.
• Grants for public school recipients can cover tutoring, extended-day and summer programs, college credit or Advanced Placement courses and potentially services and other expenses not covered by students with disabilities’ individualized education programs.

Timeline for the Federal Scholarship Tax Credit

July 4, 2025: President Trump signs the One Big Beautiful Bill that includes the  Education Freedom Tax Credit, also known as the Federal Scholarship Tax Credit.

Oct. 1, 2026: U.S. Treasury Departmentreleases draft regulations for the Federal Scholarship Tax Credit (FSTC) program; 60-day public comment period begins.

Dec. 15, 2026: The Treasury Department will host a public hearing at the IRS building in Washington, D.C.

Dec. 31, 2026: Deadline for states to submit their participation in the FSTC.

Jan. 1, 2027: Individual taxpayers can begin donating contributions to eligible SGOs.

Feb. 15, 2027: Deadline for states to submit their list of eligible scholarship-granting organizations to the IRS.