TL;DR

  • The EFTC is a federal credit, residents can claim up to $1,700 whether or not their state opts in.
  • But scholarships only reach students in states that opt in by designating SGOs. Sit out, and your residents fund students elsewhere.
  • If just 100,000 residents each claim the credit, $170M+ in donations leaves the state.
  • Opting in costs the state nothing, the credit is federally funded, with no state appropriation.

Why the money leaves

The Education Freedom Tax Credit (§25F) is a federal credit, so residents can claim it whether or not their state participates. But scholarships only reach students in states that opt in by designating Scholarship Granting Organizations (SGOs). Sit out, and your residents donate to organizations in neighboring states, sending the dollars, and the benefit, elsewhere.

It comes down to how the money moves. A donor gives to an SGO and claims the federal credit. That SGO awards scholarships to eligible families in a state whose governor has opted in and submitted a list of qualifying SGOs to the U.S. Treasury. No opt-in means no designated SGOs, and no in-state organizations to receive donations or fund local students.

The math

The leakage adds up fast. One example: if just 100,000 residents each claim the $1,700 credit, $170M+ in donations leaves the state, funding students elsewhere instead of at home.

100,000 × $1,700 = $170,000,000 in donations that could have funded local scholarships, flowing out of state because there are no in-state SGOs to receive them.

What’s at stake

That loss compounds quickly. With millions of taxpayers in many states, the annual amount at stake could exceed $1 billion. When those dollars leave, the ripple is local:

  • Families miss out on K–12 scholarships for tuition, tutoring, materials, and therapies.
  • Schools, tutors, and service providers lose the enrollment and spending that scholarships would have supported.
  • Local economies lose the staff wages and vendor spending that follow the scholarship dollars.

Opting in costs the state nothing

Here is the part that makes opting out hard to justify: keeping those dollars at home doesn’t cost the state anything. The credit and the scholarships are funded federally, there is no state appropriation and no impact on state education budgets. A participating state’s role is simply to elect to opt in and submit its list of qualifying SGOs to Treasury each year, administrative steps, not new spending.

Opting in keeps the federal credit working locally: scholarships for families, donations flowing through in-state SGOs, and no added cost to the state budget. To see where your state stands and who decides, check the state-by-state status map.

Frequently asked questions

If my state opts out, can I still claim the EFTC credit?

Yes. The Education Freedom Tax Credit is a federal credit, so any eligible taxpayer can claim up to $1,700 regardless of whether their state participates. The catch is where the scholarships go: you would donate to a Scholarship Granting Organization in a state that has opted in, so the scholarship benefits a student there, not in your own state.

Why don't scholarships reach my state if it opts out?

Scholarships flow only through SGOs that a participating state's governor has designated and submitted to the U.S. Treasury. If your state doesn't opt in, it designates no SGOs, so there are no in-state organizations to receive donations and award scholarships to local families.

Does opting in cost the state money?

No. The credit and the scholarships are funded federally, there is no state appropriation and no impact on state education budgets. A participating state's role is to elect to opt in and submit its list of qualifying SGOs to Treasury; those are administrative steps, not new spending.

Can my state change its mind later?

Yes. Opt-in is an annual election, so a state that sits out one year can participate in a future year. But every year it waits, its residents' donations, and the scholarships they would fund, flow to other states instead.