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.
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, commonly referred to as the Federal Scholarship Tax Credit or Education Freedom Tax Credit, individual taxpayers will be able to claim a federal, dollar-for-dollar tax credit of up to $1,700 annually for contributions to a qualifying Scholarship Granting Organization (SGO), beginning in 2027. The credit only benefits a state’s students if that state’s governor formally opts in and submits a list of qualifying SGOs to the IRS.
The Internal Revenue Service said that 27 states have formally elected to participate. “It’s encouraging to see that 27 states have already signed up to participate in this program that promotes and supports elementary and secondary education,” IRS Chief Executive Officer Frank J. Bisignano said in a statement. “We are hopeful that additional states will decide to participate.”
More Than Half the Country Has Signed On
As the map below shows, the 27 participating states stretch from Alaska to Florida — a bloc anchored in the South, the Plains, and the Mountain West, joined by Midwestern neighbors Ohio and Indiana and, in the Northeast, New Hampshire — leaving Pennsylvania as an island of indecision surrounded on nearly every border by states already in: Ohio and West Virginia to the west and south, with Virginia just beyond.
The 27 states that have opted into the Section 25F Federal Scholarship Tax Credit, per the IRS’s official list. Pennsylvania, highlighted, has not yet decided.
The agency said it would continue to update the official list as additional states complete the election and submission process. At the time of the IRS’s latest update, Colorado was the only state led by a Democratic governor included on the official list. Other Democratic governors have either announced plans to participate or opposed the program through vetoes or other actions.
Pennsylvania is among the states that have not yet decided. A spokesperson for Gov. Shapiro has said the administration is awaiting federal guidance on how the credit would interact with the state’s existing EITC and OSTC programs before making a decision. The Treasury Department has indicated that proposed regulations are expected by the end of September, and states may rely on that guidance for purposes of the 2027 tax year.
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. Those organizations could potentially serve as SGOs under the federal program if Pennsylvania opts in.
Friends of Education will continue to track Pennsylvania’s decision on the federal opt-in question, along with any future action on EITC and OSTC funding, and will share updates as they develop.
Questions about how these programs may affect you? Contact Friends of Education.
