COMMENTARY: The Main Street economics of the Education Freedom Tax Credit

The federal Education Freedom Tax Credit rolling out in 2027 could generate at least $24 billion for education. Annually. Often when we discuss billion-dollar tax credit programs like this, we picture institutions behind a curtain choosing how those dollars will be spent, and we as taxpayers, or beneficiaries of the funds, take what they decide.

Beginning in 2027, when the federal Education Freedom Tax Credit program goes into effect, a new picture of a tax credit program emerges. It emerges on three fronts: (1) the source (and choice) of taxpayers; (2) the distribution of funds as scholarships directly to students (not systems); and (3) the sheer scale of funds that can be generated.

The program’s mechanics create a new tax credit of up to $1,700 for taxpayers who make qualified contributions to not-for-profit, mission-driven Scholarship Granting Organizations (SGOs) of their choosing. SGOs then award unlimited scholarships to eligible K-12 students that can be used for qualified educational expenses — such as tuition, tutoring or other academic-related expenses — chosen by their parents.

Much of the conversation has centered on school choice, which is one way parents may choose to spend their scholarships. However, something entirely different may arise when millions of families start exercising their purchasing power with these dollars. Demand will become visible, driven by Main Street economics.

Tens of millions of K-12 students are likely to meet the income eligibility threshold for EFTC scholarships. Families newly empowered with funds will have significant purchasing power, and where they choose to spend their scholarship dollars could drive exciting business growth locally and nationally. Existing education services businesses may expand, and new ones may appear. Among those new business owners might be tutors, learning specialists, and current and retired educators who want to offer their expertise outside of the classroom.

An entire education services community could grow in urban and rural America, and a Main Street education economy could emerge.

This new economy will be funded by the nine out of 10 students who are expected to meet the eligibility requirements for scholarships from SGOs. Keep in mind, there is no limit on how many dollars students are able to receive. The threshold for qualifying is a household income of 300 percent of the area median gross income.

Applying that to Department of Housing and Urban Development data, households in the Denver area with incomes up to $420,300 are eligible for federal Education Freedom Tax Credit scholarships. Similarly, households in the Atlanta metro area with incomes up to $342,600 are eligible for federal Education Freedom Tax Credit scholarships.

According to the Census Bureau’s 2024 American Community Survey, 30 million students live in the 30 states that have opted in to the federal Education Freedom Tax Credit program. Even though 90 percent of them could fall within the household income limit, not all of them will seek scholarships. However, if enough contributions from taxpayers to award even half of the eligible students a $1,000 scholarship, we could see more than $13.2 billion in family-directed educational purchasing power supporting this new education economy.

Consider tutoring, an expense the Treasury Department has said it would cover. One family may qualify for and receive a $5,000 scholarship, which the family chooses to spend at a local tutoring business. If a dozen families in that same district choose the same tutoring business, that business may now be able to add more hours or hire another tutor. Eventually, that small business might open a storefront, filling unused office space.

A teacher might start an after-school reading tutoring business, charging $50 per hour per student and serving five students at a time. If she tutors for two hours a day, four days a week during a 36-week school year and increases that to four hours a day, four days per week over a 16-week summer, that small business could generate $136,000 in annual revenue.

This is how small businesses grow. This is how communities change.

Recent research from the Brookings Institution reminds us that small businesses play a unique role in local economies. They sustain local growth and drive economic transformation. Small businesses don’t need every available dollar. They just need some. Twenty or 30 new customers, each with new funds to dedicate to a child’s needs, can significantly affect a local business and, collectively, the local economy.

Rural communities and lower-income neighborhoods could see education-minded businesses move into their areas. Typically, the incentive for locating a business is to place it where the most affluent families live, but that is no longer necessarily the case. Previously underserved communities may have enough demand to support these businesses.

Admittedly, not every scholarship will stay local, but that enhances opportunity rather than stifling it. Parents should choose the services they deem best. The scale of positive, family-first change is far-reaching enough that local economies could still benefit.

That teacher who considered providing tutoring to students? The extra money is nice, but consider the effect teachers could have when providing after-school services to students they already know. That is visible change.

The national numbers around the Education Freedom Tax Credit program are enormous. Yet, its most interesting effects could happen in increments of 20 or 30 families. That’s enough to give a tutor a little more business, enough to encourage a reading specialist to open a practice, or enough for a small business to open a second shop across town. Multiply those small effects across thousands of communities and millions of families, and the secondary effect of this program may become visible. Especially on Main Street.

Cecilia Retelle Zywicki is the CEO and co-founder of LearningSpring, which partners with states to implement the Education Freedom Tax Credit. She wrote this for InsideSources.com.