Tax-Credit Scholarships, the Choice Program Built on Private Donations

Here is a puzzle for a lawyer. A state wants to help poor children attend a private school, and opponents are ready to sue. If the state writes a check to the school, the opponents say the state is funding religion. If the state writes a check to the family, they say the same. So the state does something clever. It writes no check at all. It tells its citizens that if they give their own money to a scholarship fund, they may subtract part of the gift from their tax bill.

That is a tax-credit scholarship. It is a choice program with no appropriation, and for that reason it has proved one of the toughest in the country in court. This post explains how it works, walks through the cases that shaped it, and describes the federal version Congress enacted in 2025. I will also give the best case against it.

The claim

A tax-credit scholarship is a legitimate and legally durable form of school choice because the money it moves was never the government's to begin with, and that single fact explains both its survival in court and its appeal to legislators who cannot pass a spending bill. I will argue the point in order.

The mechanism

Start with the terms.

A tax credit reduces the tax a person or company owes, dollar for dollar. That is different from a deduction, which reduces the income on which tax is calculated. A $1,000 credit saves a taxpayer $1,000. A $1,000 deduction saves him $1,000 times his tax rate, a smaller sum.

A scholarship-granting organization, or SGO (in some states called a scholarship tuition organization), is a private nonprofit that collects donations and uses them to award scholarships to students to attend private schools. State law sets who may qualify, usually by family income, and sets rules for the organization: how much it may keep for expenses, how it must report, and how it must treat donors' designations.

Put them together. A taxpayer gives money to an SGO. The state allows her to claim a credit against her state income tax for some or all of the gift, often up to a cap. The SGO awards scholarships to children. The child's family chooses a participating private school.

Follow the money and you will notice what is missing: the state treasury never receives the donation and never pays it out. The legislature appropriates nothing. The government forgoes tax revenue that it would otherwise have collected. Whether that is a "cost" to the state is a question we will reach, and it is the heart of the legal and political arguments.

The Arizona model, 1997

Arizona led the way. In 1997 its Legislature enacted an individual income tax credit for contributions to "school tuition organizations," which in turn gave scholarships to students to attend private schools. Opponents sued, arguing that the credit violated provisions of the Arizona Constitution that restrict public money from going to religious schools and the federal Establishment Clause.

In Kotterman v. Killian, decided in 1999, the Arizona Supreme Court upheld the credit. The reasoning rested on a distinction at the center of this whole subject. The court held that the money donated to a school tuition organization was not "public money" in the constitutional sense, because the donor was giving his own money, and the credit was a reduction in what he owed, not a government grant. A taxpayer who chooses to keep more of his own money does not, by doing so, make it the state's.

The United States Supreme Court has an analogous line of reasoning. In Mueller v. Allen (1983), the Court upheld a Minnesota tax deduction for parents' education expenses, including private school tuition, and observed that the benefit reached families through the independent choices of private individuals. The Zelman decision in 2002 built on similar logic in the context of vouchers.

Arizona's program grew. Other states watched.

Florida, 2001, and the spread

Florida enacted a tax-credit scholarship in 2001. The Florida program, as it was originally designed, used a corporate tax credit, so businesses could redirect part of their state tax liability to scholarship funding for low-income students. Over the years it grew into one of the largest private-choice programs in the country, with changes to its design, caps and eligibility along the way.

A number of other states followed over the next two decades with their own variations: individual credits, corporate credits, or both, with caps and income limits that differ widely. I will not list every state, because the count changes with each legislative session. The tax-credit scholarship became a standard instrument of choice in state legislatures, including in states where voters and courts were hostile to direct payments.

Winn, 2011, and the question of standing

The legal test that mattered most for these programs came in a case from Arizona. In Arizona Christian School Tuition Organization v. Winn, decided in 2011, a group of Arizona taxpayers sued to challenge the school tuition organization credit under the Establishment Clause. They argued that because the credit let some taxpayers redirect money to religious schools, it was effectively spending, and that as taxpayers they had a right to bring suit.

The Supreme Court disagreed, by a vote of five to four, in an opinion by Justice Kennedy. The Court held that the plaintiffs lacked standing. The general rule is that a person cannot sue in federal court merely because he is a taxpayer who dislikes how the government spends money. The Court had recognized a narrow exception in Flast v. Cohen (1968), allowing a taxpayer to challenge a congressional spending program that violates the Establishment Clause. The Winn Court declined to extend that exception to a tax credit, reasoning that a credit is not a government expenditure. When Arizona permitted a taxpayer to take a credit for private contributions, it did not collect the money and then pay it out. Whatever money reached religious schools reached them by the voluntary choices of private donors, and the plaintiffs could not show a personal injury from those choices.

Think about what the decision did. It did not hold the credit constitutional on the merits, since it only held that these plaintiffs could not sue in federal court. But it closed the main federal door through which opponents might have attacked such programs, because nearly any plaintiff attacking a credit as a taxpayer would meet the same obstacle. The reasoning, that a credit is not spending, was the same reasoning on which the state had built the program.

The dissent, written by Justice Kagan, argued that a tax credit is functionally a government subsidy and that the distinction between a credit and a payment is one of form. This is a serious argument, and you should hear it at its best: if the government gives a benefit by way of a tax break instead of a check, it has still chosen to spend its resources, in the sense that it has chosen to forgo revenue, and that choice can be challenged. Economists call tax breaks "tax expenditures," and the dissent in effect adopted that framing.

Answering the dissent

Here is how I would answer, and why I think the majority had the better of it.

1. Taxpayers do not own their money by permission of the state. A government that taxes at a given rate is not "spending" what it chooses not to take. If it were, every deduction, every exemption and every child credit would be a government expenditure, and the state would be deemed to own the entire income of every citizen, grudgingly returning some of it. That is a theory of the state that sits poorly with the American tradition.
2. A credit requires the taxpayer to act. The donor must decide to give his own money to a private organization, and the organization must decide whom to help. The state does not pick the school. The family does.
3. The consequences of the dissent's theory are broad. If a tax credit is spending for the purpose of the Establishment Clause, then the deductions for charitable gifts to churches, the property tax exemption for houses of worship and many other long-standing features of the tax code would be open to challenge. The Court was right to be cautious about so sweeping a principle.

This is a question on which reasonable people differ. I am giving you my answer, and I am telling you the other side has a real argument.

Why it survives other challenges

A word about state constitutions. Many states have provisions, often called Blaine amendments after a failed 19th-century proposal for a federal amendment, that bar public funds from going to religious schools. They arose in an era of hostility toward Catholic immigrants and are a shameful chapter in American history, though they remain on the books in many states.

Tax-credit programs have an advantage here that appropriated programs lack. Courts in several states have reasoned, as the Arizona Supreme Court did, that donated money is not public money. Programs that spent appropriated money, such as certain voucher programs, have been more vulnerable under these state provisions.

The United States Supreme Court has also narrowed what a state may do with these provisions. In Espinoza v. Montana Department of Revenue (2020), the Court considered a Montana tax-credit scholarship program. The state had created the program, and then its supreme court struck down the whole thing under a state constitutional bar on aid to religious schools, because some scholarships went to religious schools. The United States Supreme Court held that the Free Exercise Clause prohibited the state from excluding religious schools from a generally available benefit solely because of their religious character. The case is the clearest proof that tax-credit scholarships were becoming central to the national legal fight. In Carson v. Makin (2022), the Court extended the logic to a Maine tuition program.

The federal credit of 2025

For decades, tax-credit scholarships were a state matter. In 2025, Congress changed that. The budget reconciliation law enacted that summer, commonly called the One Big Beautiful Bill Act, signed on July 4, 2025, included a federal tax credit for contributions to scholarship-granting organizations. As I understand the provision, it allows a taxpayer to claim a credit, up to $1,700 per taxpayer per year, for contributions to a qualifying SGO, and it applies to donations made starting in 2027. The credit is nonrefundable, and you should check the statute and Treasury guidance for the rules on eligible organizations and students.

The feature that matters most is that the federal credit is opt-in by state. A state must choose to participate, by designating or approving the scholarship organizations in the state and agreeing to the framework. This is where federalism enters. Washington creates the credit, but it does not compel any state to take part, and each governor or legislature decides. A state that declines forgoes the benefit for its residents.

I will say a word about what this does and does not do. It does not create a federal school-choice entitlement, it does not send a federal check to any school, and it does not tell a state how to run its schools. It adds a federal incentive on top of a state structure, using the same legal logic the Court accepted in Winn. Whether you think the opt-in design is a model of federalism or a way of pressuring states, it is worth watching. The details will be settled in regulations and in how many states choose to join, so the sources to check are the Internal Revenue Code, Treasury guidance and your own state's announcements.

The best case against

Time to be fair to the critics. The strongest objections to tax-credit scholarships are these:

• Lost revenue. Every dollar of credit is a dollar the treasury does not collect. A tax credit is a form of spending by another name, and it should be reported and scrutinized like any other. Caps and annual reporting help, and I would add that the credit's cost should be published each year.
• Accountability. Private schools that accept scholarship students may not be subject to the same testing and reporting rules as public schools. Parents are the first line of accountability, but a state may reasonably want data.
• Concentration among those already choosing. If a large share of scholarship recipients were already in private school, the program subsidizes existing choices. Income limits and targeting rules can address this.
• Donor steering. Some programs allow donors to recommend particular students or schools, which can turn a scholarship into a way to pay one's own child's tuition. Good statutes forbid that.

These are fair concerns, and a good program answers them in its statute. None of them undermines the basic principle, which is that families should be able to choose, and citizens should be free to give their money to help.

The conservative principle

There is a principle at work here that conservatives hold in many other areas. We believe in civil society: the churches, charities and associations that Tocqueville praised in the 1830s as the secret of American self-government. A tax-credit scholarship strengthens that sector instead of replacing it. It invites a neighbor to help a neighbor's child, and it treats the donor as a participant instead of a spectator. When you give to a scholarship fund, you do something a tax bill cannot make you do: you decide.

That connects to the broader argument about money and who owns it. We discuss the tax side of the question at length on The Sixteenth Amendment and the 1913 bargain that built the income tax and Who actually pays the federal income tax, read straight from the IRS tables. On the school-choice side, see Arizona Made Every Child Eligible for an ESA, How the Idea Spread So Fast for the account-based model, and Milton Friedman's 1955 Voucher Essay and Its Seventy-Year Road for where the idea began. For the Supreme Court cases that open the way, see Mahmoud v. Taylor and the Storybooks That Brought Opt-Outs Back to School on parental rights and the religious-liberty principle.

You can read the Constitution's text on the Establishment Clause and the powers of Congress at the Constitution page, and follow the cases on the courts page.

The case in brief

1. A tax-credit scholarship lets a taxpayer give to a private scholarship fund and subtract part of the gift from his tax bill, so no appropriated government money is spent.
2. Arizona enacted the first major credit in 1997 and the state supreme court upheld it in Kotterman v. Killian (1999); Florida followed in 2001.
3. In Arizona Christian School Tuition Organization v. Winn (2011), the Supreme Court held that taxpayers lacked standing to challenge the credit, because a credit is not government spending.
4. Espinoza (2020) and Carson (2022) bar states from excluding religious schools from generally available benefits, and Congress enacted a federal scholarship tax credit in 2025 that each state must opt into.
5. The concerns about lost revenue, accountability and targeting are real, and a well-written statute answers them.

What you can do: find out whether your state has a tax-credit scholarship program, read how its credit and caps work, and ask your governor's office whether the state will opt into the federal credit.