Education Freedom Tax Credit could pour tens of billions into K-12 school choice, report finds 

The federal Education Freedom Tax Credit (EFTC) could inject nearly $19 billion a year into K-12 scholarships starting in 2027 if just 10% of eligible taxpayers participate, according to a new report.

The American Federation for Children (AFC) report estimates that 121.5 million tax filers have sufficient tax liability to claim the credit. That’s 74.2% of all projected federal returns.

Congress passed the EFTC as part of 2025’s Big Beautiful Bill Act. The legislation allows individuals to claim a dollar-for-dollar federal tax break of up to $1,700 annually for contributions to nonprofit scholarship-granting organizations.

Those organizations then bundle the contributions into school choice scholarships for students in participating states. Any taxpayer can claim the credit regardless of where they live, but scholarships are restricted to participating states.

If every eligible taxpayer claimed the full credit, the theoretical funding capacity would reach an estimated $160 billion to $187.9 billion annually, the report found.

That figure more than doubles previous projections from organizations such as Education Reform Now, which estimated 47 million eligible donors by counting only tax filers earning above $85,000.

“Two-thirds of filers below that $85,000 level who owe federal income tax will owe at least $1,700 in 2027,” AFC Senior Fellow Patrick Graff, who authored the report, told Heartlander News.

He noted that updating the calculations for 2027 tax rules and inflation expanded the donor pool dramatically. “There’s potentially a lot more money on the table than many folks had previously realized because there’s a path for a lot of those middle-income families.”

Families do not have to wait until tax season to make the contributions. They can adjust their federal paycheck withholding using a W-4 form. A taxpayer can reduce their biweekly withholding by $65 instead of making a lump-sum donation. The impact can quickly become substantial.

“You can actually do this in a cash-flow neutral way. You don’t have to make those payments up front,” Graff said. “If a couple percentage points of parents in that middle-income bracket make donations, that’s billions of dollars a year going to scholarships.”

EFTC resistance

Some states are resisting the EFTC program. Thirty-one states have already opted in or signaled their intent to participate, while 19 states and the District of Columbia have either declined or have not yet announced a decision. 

Student eligibility remains tied to state participation. Nearly 21 million children live in nonparticipating states.

An earlier report from Graff found that more than 50 million K-12 students, or nearly 92% of students, would be eligible for scholarships if every state participated.

He said the undecided governors – all Democrats – must choose whether they want donations to benefit students in their states or elsewhere. 

“I think this is the conundrum for a lot of governors,” Graff said. “Those dollars will leave the state. If you’re in California and 10% participate, that’s billions of dollars that could be used for K-12 scholarships in California that are either going to the federal treasury or leaving the state to fund scholarship organizations in states that opted in.”

The tax credit takes effect Jan. 1, 2027, although states are indicating participation now to allow schools and scholarships granting organizations time to prepare.