Scholarship tax credits encourage private donations to expand educational opportunities for low‐ and middle‐​income families. STCs grant tax credits to individual and/​or corporate taxpayers who contribute to nonprofit scholarship organizations. Those nonprofits use the money to provide financial assistance to parents so that they can choose the education that works best for their children.

Ideally, any individual or corporate taxpayer who donates to a scholarship organization should be able to claim a dollar‐​for‐​dollar credit. Since STCs are intended to serve families who do not sufficiently benefit from personal‐​use education tax credits (ETCs), scholarship should be restricted to families below a certain income threshold. The income eligibility cut‐​off should be high enough to allow middle‐​income families to participate since the personal‐​use ETCs may not sufficiently cover the cost of a child’s education. Within that framework, scholarship organizations should have the flexibility to tailor the size of scholarships to the particular needs of particular families. They should also have the freedom to set their own funding priorities and scholarship eligibility standards — just as other charitable organizations do.

Scholarship recipients should be able to use the funds for a wide range of education‐​related expenses, including tuition, tutoring, textbooks, educational materials, homeschooling curricula, online courses, and more. As with personal‐​use ETCs, flexibility in spending is crucial to the effective operation of the market. Granting parents broad discretion in their educational spending will foster innovation in educational services as entrepreneurs seek new ways of providing value to families. By contrast, limiting the credits to private school tuition or textbooks would enshrine the existing system of education. Likewise, policymakers should not impose additional regulations on private schools accepting scholarship students, thereby limiting the very diversity and innovation that give educational choice its value.

As of July 2015, 16 states have enacted 20 STC programs. The oldest of these is Arizona’s individual‐​donor tax credit, enacted in 1997. Montana and Nevada were the two most recent states to enact a scholarship tax credit. The programs vary in size and design from state to state. The two major factors that distinguish STC programs are the sources of donations (donor type) and the eligibility criteria for scholarship recipients:

  • Donor Type: The criteria that a taxpayer must meet to be eligible to receive a tax credit in return for a donation to a scholarship organization. Some states limit the credits to individual taxpayers while others limit credits to corporate donations. Eight states allow both individuals and corporations to receive tax credits for donating to scholarship organizations.
  • Scholarship Recipient Eligibility: The criteria that a student must meet to be eligible to receive a scholarship. Most states limit scholarships only to low‐​income students while others restrict eligibility to special needs students and/​or students assigned to low‐​performing district schools.
State Donor Type Scholarship Recipients # of Recipients Year Enacted
Alabama Individual & Corporate Low‐​Income 2,851 2013
Individual Low‐​Income Priority 40,918 1997
Corporate Low‐​Income 12,955 2006
(Lexie’s Law)
Corporate Special Needs, Foster Care 345 2009
Individual Switchers, Low‐​Income Priority n/​a 2012
Florida Corporate Low‐​Income, Foster Care 69,671 2001
Georgia Individual & Corporate All Pre‐​K‐​12 13,268 2008
Indiana Individual & Corporate Low‐​Income 11,067 2009
Iowa Individual & Corporate Low‐​Income 10,254 2006
Kansas Corporate Failing Schools (Low‐​Income) n/​a 2014
Louisiana Individual & Corporate Low‐​Income 53 2012
Montana Individual & Corporate 100% Eligibility N/A 2015
Nevada Corporate Low‐​Income N/A 2015
New Hampshire Corporate Low‐​income 40 2012
Oklahoma Individual & Corporate Low‐​Income or Failing Schools 709 2011
Pennsylvania (EITC) Corporate Low‐​Income 38,278 2001
Pennsylvania (OSP) Corporate Failing Schools (Low‐​Income) 7,601 2012
Rhode Island Corporate Low‐​Income 411 2006
South Carolina Individual & Corporate Special Needs 405 2013
Virginia Individual & Corporate Low‐​Income or Special Needs 982 2012

Source: Friedman Foundation for Educational Choice, Alliance for School Choice Yearbook.

Studies of the financial impact of STC programs in three states found that they saved money by decreasing government expenditures more than they decreased tax revenue. The Florida legislature’s nonpartisan Office of Program Policy Analysis and Government Accountability found that their state’s STC program saved $1.44 in state expenses for everyone $1 of forgone state tax revenue. The Commonwealth Foundation reported that Pennsylvania saved $512 million a year and an independent study of Arizona’s STC program estimated savings of between $99.8 million and $241.5 million.

To ensure that the tax credits are fiscally neutral or save money at the state level, policymakers limit the size and growth of the scholarship tax credits in various ways, including

  • Credit Value: The percentage of donations eligible for tax credits. These range from 50 percent to 100 percent in existing programs. Higher percentages encourage more giving, thereby increasing the amount of funds available to expand educational choice for families.
  • Total Credit Cap: The total amount of tax credits available for eligible donors to claim in a given year. Ideally, states would not limit participation in STC programs through such caps, but policymakers sometimes view the cap as a fiscal (or political) necessity. Some states include “escalator” provisions so the caps automatically increase over time, allowing the supply of scholarships grow to meet demand.
  • Credit Cap Escalator: The amount that the total credit cap increases each year, if at all. In some states, the escalator is triggered only when the total credits claimed in the previous year reach a certain percentage of the total credit cap. In other states, the total credit cap increases automatically.
  • Donation Cap: The maximum amount that an individual or corporate taxpayer can donate. Sometimes these caps are a percentage of the taxpayer’s tax liability, other times they are a fixed amount for all taxpayers. Such caps make fundraising more difficult, necessitating scholarship organizations to attract more donors to raise the same amount of funding that they could without such a cap.
  • Scholarship Cap: The maximum amount of money that a scholarship organization can disburse to each scholarship recipient. New Hampshire mandates a maximum average scholarship size, which gives scholarship organizations more flexibility while ensuring that the tax credits are fiscally neutral or save money. Larger scholarships are obviously more useful to low‐​income families.
State Credit Value Total Credit Cap Credit Cap Escalator Donation Cap Scholarship Cap
Alabama 100% $30 million None Individual: up to $50,000 or 50% of tax liability / Corporation: 50% tax liability $6,000 (elementary); $8,000 (middle); $10,000 (high)
Arizona (Individual) 100% None N/A $535 ($1,070 married), adjusted annually for inflation None
Arizona (Corporate) 100% $43 million 20% Annual Increase None $5,000 (K-8); $6,300 (HS), caps increase by $100 annually
Arizona (Lexie’s Law) 100% $5 million None None Lesser of full tuition or 90% of state per pupil formula funding
Arizona (Switcher) 100% None N/A $523 ($1,064 married) after donating maximum for original individual tax credit None
Florida 100% $357.8 million 25% Increase If 90% Cap Reached 50% to 100% of tax liability, depending on tax Lesser of 80% of state public school funding formula ($5,272) or full tuition
Georgia 100% $58 million None Individual: $1,000 ($2,500 married) / Corporate: $10,000 (up to 75% of total corporate tax liability) Total average state and local expenditures per pupil
Indiana 50% $8.5 million in 2015–16; $9.5 million in 2016–17 None None Full tuition
Iowa 65% $12 million None None Full tuition
Kansas 70% $10 million None None $8,000
Louisiana 100% None N/A None Lesser of full tuition or 80% (K-8) / 90% (HS) of state per pupil formula funding
Montana 100% $3 Million 10% Annual Increase Individual: $150 50% of district school per‐​student funding
Nevada 100% $5 Million 10% Annual Increase None $7,775
New Hampshire 85% $5.1 million 25% Increase If 80% Of Cap Reached No corporation can receive more than 10% of total credits $2,541 max average ($635 homeschool), minimum $4,447 special ed, adjusted annually for inflation
Oklahoma 75% $3.5 million None Individual: $1,000 ($2,000 married) / Corporate: $100,000 Greater of $5,000 ($25,000 special needs) or 80% of average per pupil expenditure in assigned district school.
Pennsylvania (EITC) 75% (90% for two‐​year commitment) $100 million None $750,000 Full tuition
Pennsylvania (OSP) 75% (90% for two‐​year commitment) $50 million None $750,000 $8,500 ($15,000 special needs)
Rhode Island 75% (90% for two‐​year commitment) $1.5 million None $100,000 None
South Carolina 100% $8 million None 60% of tax liability $10,000
Virginia 65% $25 million None Corporations: None / Individuals: Minimum $500; Maximum $125,000 Lesser of full tuition or 100% of state per pupil formula funding

Source: Friedman Foundation for Educational Choice, Alliance for School Choice Yearbook.

Additional Resources



Model Legislation