It’s the most wonderful time of the year, at least according to the old Staples commercial. “They’re going back!” the voice-over proclaimed while a dad gleefully threw school supplies into a shopping cart in front of two melancholy children. Congress has already gone on its back-to-school shopping spree. In the One Big Beautiful Bill Act (P.L. 119-21), lawmakers opened a running tab that today’s kindergarteners probably won’t appreciate in the years to come.
Despite the OBBBA’s speedy assembly and passage, the final rules for the new school choice tax credit program and the excise tax on net investment income of some private colleges and universities are less expansive than they were when proposed. But both policies are likely targets for changes in the future.
The Dawn of Semipublic Schools
Parents who are forking over hefty sums so that their children can attend a private school will likely soon find their schools are semipublic institutions subsidized by federal school choice dollars — and more expensive in the bargain. They can thank economist Milton Friedman and his modern-day adherents, who maneuvered a novel federal tax credit for qualified contributions to scholarship-granting organizations (SGOs) into the OBBBA. Formerly private schools will also have far greater exposure to increasing federal rules about how they operate. To the extent that these are written into the tax code, parents will probably have limited opportunities to challenge them.
SGOs do not exist in nature; they are creatures of school choice statutes. If donors want to hand out scholarships for children to attend private schools, there is a well-established path to doing exactly that in the tax law. But these payments are not charitable contributions at all. They are redirections of tax dollars owed to Treasury. A taxpayer may make a qualified contribution of up to $1,700 per year and receive a 100 percent credit reduced only by any amount allowed on a state tax return as a credit for qualified contributions.
The OBBBA’s version of taxpayer-funded school choice “scholarships” limits them to children whose families have incomes that are 300 percent or less of the area’s median gross income. That’s meant to be a stepping stone to the universal eligibility of most state programs, and it isn’t a terribly meaningful restriction in any event. For reference, the Orlando, Florida, suburb of Winter Park has a median gross income of $98,100, making the federal handouts available to families making up to $294,300. The median gross income of Bethesda, Maryland, is $162,000, so recipients can have up to $486,000 in household income. The median income for the census tract containing the Massachusetts Institute of Technology and Harvard is $152,100. And the median income in Topeka, Kansas, is $99,100. (Fannie Mae, “Area Median Income Lookup Tool.”)
States must opt in to section 25F for their residents to receive scholarships from SGOs in their states, but taxpayers in any state can make qualified contributions and receive credits. Some governors have signaled that they want to see what’s in the tax law guidance before they make an election. Subsection 25F(h) says that Treasury will issue guidance providing for enforcement of the requirements for SGOs and the creation of the states’ lists of SGOs, as well as recordkeeping and information reporting requirements. There isn’t much leeway for the guidance to alter the scope of the program.
Unlike the House’s initial proposal, the final version has no volume cap on the amount of qualified contributions that can be made, which means that the experiment in expanding the tax code into a broad-based educational social welfare program is potentially quite expensive. The Joint Committee on Taxation estimated that the cost of the new provision will be $25.9 billion over the 10-year budget window (JCX-35-25).
In its hasty pursuit of taxpayer-funded school choice, Congress nearly opened the door to massively diluting the original, family-funded form of it, in contravention of Friedman’s ultimate objective that eventually the government would stop funding education altogether. Parents who have chosen, against nearly all personal interests, to homeschool their children and who know the 20th-century legal history of the practice aren’t eager to have state funds. They know that providing an excellent education to their children takes time and energy that is far better spent on academic pursuits than on checking boxes for bureaucrats, whether employed by the state or an SGO. Congress appropriately left homeschoolers out of the expansive school choice program in the OBBBA. But it was an unacceptably close call. That’s because the school choice lobby wants everything to be a “choice” program, and most states with tax-funded programs have gone along with the all-inclusive approach. The problem is that, unlike some educational businesses, the history of homeschooling proves that it does not require a state handout for viability. Good homeschooling has one indispensable ingredient, and it’s not money — it’s parent and student effort. More money is apt to make homeschooling worse and far less tailored to the individual student and their interests and aptitudes by encouraging parents to substitute pricey group programs for the requisite effort of individualized instruction.
The anecdotal evidence from the state-level school choice programs on which the OBBBA’s school choice provision is modeled points to at least one unsurprising reality: High-income parents are quite well informed about any state-dispensed goodies that they are eligible for. For example, in February the Orlando Sentinel reported that at a private K-8 school in one of central Florida’s wealthiest communities, the percentage of students who had used a tax credit-funded program to pay for part of the cost leapt from 3 percent to 98 percent in the year the state program became available to students regardless of family income. (“Florida’s Supercharged Voucher Program Sends Millions to Wealthy Families, Pricey Private Schools,” Orlando Sentinel, Feb. 13, 2025.) If a similar pattern emerges in the federal program, it could eventually spell trouble for school choice largesse. As the other major education policy change in the OBBBA demonstrates, once a program is in the tax code, it’s susceptible to alteration — in either direction — according to political will.
Higher Ed Excise Taxes
In most parts of [America], excises must be confined within a narrow compass. The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws.
Alexander Hamilton, The Federalist, No. 12.
In contrast to the taxpayer-funded perks for private K-12 schools, their private higher-education counterparts took a drubbing in the OBBBA. The inquisitive and peremptory spirit of excise laws that Hamilton noted evidently didn’t concern Congress in this case. Perhaps that’s because the new excise tax is confined within an exceedingly narrow compass — a recent estimate from the American Enterprise Institute found that around 20 universities will likely be subject to the tax in 2026 and a handful more within the next five years. (Mark Schneider and Christopher Robinson, “How Much Will Universities Pay in Endowment Tax,” AEI, July 14, 2025.) They’re mostly exclusive institutions of the type that very few American voters have attended, but nearly everyone has heard of: Harvard, Yale, Princeton, Stanford, and MIT top the list, with Notre Dame not far behind. The JCT estimated that the changes to section 4968 would raise $761 million over the 10-year budget window.
New Haven, Connecticut, USA - July 25, 2016: Welcome to Yale University sign located along Trumbull Street in New Haven, Connecticut. Photograph taken with purple flowers blooming in the foreground
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The amendments to section 4968 increased the excise tax on NII for applicable private colleges and universities from 1.4 percent to 8 percent. A rate of 21 percent had been floated in the House proposal. Institutions must have at least 3,000 tuition-paying students and a student adjustment endowment above the threshold. The NII includes student loan interest income and federally subsidized royalty income, and assets and NII of any organization related to the educational institution are treated as assets and NII of the institution.
The text of the OBBBA doesn’t offer an explanation as to why Congress imposed the new excise tax, but the House report was more forthcoming:
The Code provides generous tax benefits to private colleges and universities. Despite these generous tax benefits, tax-exempt colleges and universities have been subject to scrutiny in recent years for failing to operate primarily for their tax-exempt purpose, protect students on campus and foster an environment where students can receive an education free from discrimination and harassment, and abuse the tax code in ways that Congress did not intend. Congress believes that in order to allocate tax burdens more fairly, the wealthiest of these institutions should be required to contribute a greater share of their income in taxes.
Treasury was charged with writing guidance to prevent avoidance of the excise tax, including rules to thwart restructuring of endowment funds “or other arrangements designed to reduce or eliminate the value of net investment income or assets subject to the tax.” Schools also have increased reporting requirements under the OBBBA.
The carrot-and-stick approach to education policymaking through the tax code in the OBBBA is fundamentally at odds with the Trump administration’s stated intent to return authority over education to the states and local communities, as expressed in a March 20 executive order, “Improving Education Outcomes by Empowering Parents, States, and Communities.”
“Unfortunately, the experiment of controlling American education through Federal programs and dollars — and the unaccountable bureaucracy those programs and dollars support — has plainly failed our children, our teachers, and our families,” the order said. But neither the K-12 school choice social welfare program nor the university excise tax ends federal control. Instead, they further entrench education policy at the federal level by shifting the framework for federal control into the tax system. And that plan does not merit a passing grade.