New school choice tax credit stirs budget fears — but the funding math is complex

A new federal school choice tax credit is prompting warnings that public schools will lose money as students decamp for private options. But recent trends in California and other states suggest the budget effects may be less straightforward than opponents fear.

Over the last decade, California’s public school enrollment has fallen by about 500,000 students, or 8%. Yet funding for those who remained climbed as the state implemented a new funding formula, lifting California from below the national average in per-pupil spending to above it.

“As enrollments decline, we tend to see total spending at least stay constant and in many cases still increase,” said Bruce Baker, a school funding expert who has tracked patterns for years.

The debate comes as many governors — including California’s Gavin Newsom — decide whether to participate in a school choice program subsidized by a new federal tax credit passed by Congressional Republicans in the so-called “Big Beautiful Bill.” Under the credit, Americans will soon be able to redirect up to $1,700 of their income tax bill to nonprofits that provide stipends for private school tuition or other educational expenses.

The structure resembles a voucher, but states can choose whether to participate. Nearly every Republican governor has said they will join the program, while most Democrats have not publicly made a decision, according to a tracker from Education Week. Undecided governors are facing heavy lobbying from both sides.

Advocates note that the money comes entirely from federal taxes, requiring no state outlay. The credit can also be used for certain public school add-ons, such as after-school care or tutoring, though observers say it is unclear how successfully public school systems will tap those funds.

Public education groups warn that the credit — effectively a new subsidy for private education expenses — will induce some families to leave public schools. Whether that would reduce overall public education funding is less clear. If the total funding “pie” stays the same while enrollment falls, the remaining students could receive larger per-pupil allotments.

In recent years, states such as Illinois and Vermont have increased school funding even as enrollment declined. That outcome is not guaranteed. States could cut overall education budgets in response to fewer students, shrinking the pie. Fewer students could also weaken political support for public schools, though that may be less likely in left-leaning states still considering whether to participate.

California has an additional backstop: its constitution requires a certain amount of state funding to go toward education. “To the extent there actually is any measurable exodus from public schools it would mean more money per kid,” said Julien Lafortune, a school funding expert at the Public Policy Institute of California.

This doesn’t mean every district is financially secure. The fiscal impact of the tax credit remains a source of debate and uncertainty, and much will depend on how many states opt in, how families respond, and whether legislatures maintain — or reduce — overall education spending in the years ahead.