Will Pennsylvania Join the Federal Scholarship Tax Credit?
Pennsylvania’s two state tax-credit scholarship programs will go flat-funded this year, after competing bills to expand and to overhaul them both stalled before the state’s 2026–27 budget was signed this month.
Gov. Josh Shapiro signed the $50.8 billion budget on July 12, nearly two weeks after the constitutional deadline. The Educational Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC) programs, which provide tax credits to businesses and individuals who donate to scholarship organizations, remain capped at their combined $680 million for the 2026–27 fiscal year, unchanged from the prior cycle.
October 2026 Update: Since this article was published, Treasury and the IRS have issued proposed and temporary regulations implementing Section 25F. The IRS now lists 30 states that have made advance elections for 2027; Pennsylvania is not currently among them.
Two Bills, Neither Enacted
The flat outcome followed a monthslong standoff between two competing proposals. House Bill 2632, which passed the House on a party-line 105–97 vote, would have eliminated the current EITC and OSTC programs after this fiscal year and replaced them with a new, more restrictive “Education Options Tax Credit Program.” Its sponsors said the bill was intended to add accountability and reporting requirements; opponents, including Senate Republican leaders, argued it would effectively reduce available scholarship funding by more than $100 million and could eliminate scholarships for approximately 30,000 students.
The Senate answered with House Bill 1667, which passed that chamber 44–6 and would have increased EITC funding by $25 million while repealing the state’s Gross Receipts Tax on electricity bills. Neither bill made it into the final budget package.
A Separate, Larger Decision Still Pending
The budget debate leaves unresolved a separate and potentially far more consequential policy decision: whether Pennsylvania will participate in the new federal scholarship tax credit.
Under Section 25F of the Internal Revenue Code, eligible individual taxpayers may claim a federal income tax credit of up to $1,700 for qualified cash contributions to eligible Scholarship Granting Organizations beginning in 2027. For a state to participate, the required election must be made by the Governor or by another individual, agency or entity authorized under state law to make elections involving federal tax benefits. The state must also provide the IRS with its applicable list of qualified SGOs.
As of the IRS’s September 14, 2026 update, 30 states have made advance elections to participate under Section 25F for 2027. Pennsylvania is not currently included on that list.
More Than Half the Country Has Signed On
Participation has continued to expand since the IRS first announced 27 advance elections earlier in 2026. The federal program now has advance elections from 30 states, while Pennsylvania remains outside the current IRS list.
Current Federal Status
30 states have made advance elections to participate under Section 25F for 2027. Pennsylvania is not currently on the IRS list.
The IRS has said it will continue to update its official participation information as additional states complete the required election process. The most current list is available on the IRS’s Federal Scholarship Tax Credit page.
Pennsylvania remains absent from the IRS’s current list of states that have made advance elections for 2027. Earlier in 2026, the Shapiro administration indicated that it was awaiting additional federal guidance before making a participation decision. Treasury and the IRS have since issued proposed and temporary Section 25F regulations, substantially expanding the federal implementation guidance available to states, SGOs and taxpayers.
The decision carries particular significance in Pennsylvania because the Commonwealth already operates one of the nation’s largest scholarship tax credit programs, with hundreds of approved scholarship organizations participating in the EITC and OSTC. If Pennsylvania participates in Section 25F, qualifying organizations could seek inclusion on Pennsylvania’s federal SGO list if they satisfy the applicable federal and state requirements.
Friends of Education will continue to track Pennsylvania’s Section 25F participation decision, any related state legislation, implementation of the new federal regulations, and future developments affecting Pennsylvania’s EITC and OSTC programs.
Questions about how these programs may affect you? Contact Friends of Education.
