The tax bill's private school loophole would make DOGE cry

An obscure provision in the budget reconciliation bill just passed by the Senate could expand access to private school education; help the wealthy offload stocks without paying capital gains taxes; and make DOGE — if it had feelings — cry at its inefficiency. The policy would allow donors who give to an eligible scholarship-granting organization to be reimbursed dollar-for-dollar in the form of a tax credit up to $1,700 (down from $5,000 in earlier drafts). Families making up to three times the average income would be eligible for these scholarships, which is to say, most families with school-age children.

For the many kids who are stuck in subpar schools, any additional money could be a lifeline. As I’ve written before, school choice is associated with improved student outcomes, including better test scores and retention. Studies also suggest such competition increases the performance of nearby public schools.

For the naysayers who worry that school choice — whether in the form of charter schools, magnet schools or vouchers — will worsen public education, one needs only to look at the 2025 NAEP test scores. Most kids cannot read or do math at grade level. Change is needed. Parents understand this. Ask any mom if she’d want the financial freedom to choose the right school for her kid.

But the tax bill’s delivery method is clunky.

Instead of encouraging a culture of generosity and philanthropy, any money that people donate to scholarship organizations (within the bill’s limits) is entirely reimbursed. That’s like if I make my kids tithe on Sunday morning and give them a $5 bill Sunday night: hardly a charitable exercise. It’s also unclear why donating to education should be treated more favorably than say, giving to a church or to the poor.

But that’s not the only problem, as the Wall Street Journal recently pointed out. If appreciating stocks are put into the scholarship organizations, then the government would write a check to reimburse the contributing person for the full amount contributed — meaning that it becomes a way (albeit a limited one) to get cash out of your investments without paying capital gains taxes.

Presumably, this is something that anyone with stock holdings could take advantage of, but only 15% of Americans have stock outside of retirement accounts. This is precisely the kind of thing that affluent investors and their accountants are most likely to take advantage of.

This approach ends up costing the government (in other words, taxpayers) more money because now it’s the cost of the scholarship plus the cost of lost tax revenue.

The plan also exhibits some strange logic by reimbursing donations to scholarship funds, rather than direct tuition payments — that’s also inefficient, as the cost of overhead at scholarship organizations is likely 10%, at a minimum. This is a lot of money sloshing around before it ever gets to the kids.

If private school costs an average of $15,000 a year, that would require nine scholarship organization donors for every one student. (Of course, it could cover more children if the costs of school are only partially offset.)

It’s only a drop in the bucket considering there are 50 million kids in K-12 schools. And the money could end up largely going to families who already have their kids in private school (the legislation is careful to say that it’s not kids who are in public school, but only those who would be eligible for public school, who qualify). That’s not to say that those families aren’t deserving of relief, but the program might not serve as the intended lifeline for students stuck in struggling public schools.

So why are Republicans taking this roundabout way? There are several good reasons, including to ensure that faith-based schools — the preferred choice of millions of families — can access the same level of public support as private ones. Another rationale would be to get school-choice options for kids in states that are loath to pass it themselves. And backers of the plan can point to more than a dozen states that have already adopted similar plans within their borders.

Other justifications are less admirable, including that the tax code is simply a better place to hide things. Middle class parents knee-deep in high property tax payments and public school woes might not be tickled to find that they can contribute funds to offset another child’s private education, but not their own kid’s. Or that Randy next door found a new way to cash out stocks tax-free, while your family of four is struggling to afford groceries.

It would be much more efficient for the government to give the money directly to families to use as vouchers at schools of their choosing. That’s what states like Texas are already doing.

The indirect method, which is entirely new for the federal tax code, has another flaw: It opens the door to other uses down the road which conservatives might not smile fondly on. As Ethics and Public Policy Center scholar Patrick Brown rightfully identified, Democrats could use the same logic to pass a dollar-for-dollar reimbursement and capital gains shield for Planned Parenthood contributions.

School choice is necessary and it works. But if we are going to do it, let’s give the money directly to the families who need it, not use this roundabout, inefficient way that hides the ball, gives kickbacks to wealthy investors, and leaves money on the table that could have gone directly to families.