Today, October 1, the Treasury Department and IRS issued proposed regulations for the new federal scholarship tax credit (FSTC), which was created by the “One Big Beautiful Bill” last year. While this program goes beyond the federal government’s role and shouldn’t have been created, it’s crucial that its implementation maximize educational freedom.
Last week, I wrote about a potential problem in how Treasury was planning to define school. That definition matters because the FSTC law defines eligible students as an individual who “is eligible to enroll in a public elementary or secondary school” and meets certain income criteria. It then defines qualified expenses by pointing to the Coverdell Education Savings Account law, which includes expenses—such as tuition, tutoring, and services for students with special needs—“incurred in connection with the enrollment or attendance … at a public, private, or religious school.”
The FSTC law does not define school or education.
In the proposed regulations out today, Treasury says it plans to incorporate Coverdell’s definition of “school” despite the tax credit law not including that definition. Under Coverdell, a school is “any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.”
In guidance released over the summer, the Treasury Department said if it uses this definition of school, “a home school would be treated as a school if it is treated as a school under State law.” Since only around half of states define homeschooling as a school, that would mean thousands of otherwise eligible kids would be excluded from the program simply because of a Treasury regulation.
As I was digging into the proposed regulations, I realized something important. In the Coverdell definition of school, the phrase “as determined under state law” is modifying education, not school. Homeschooling is a legal way to satisfy the compulsory education laws in every state, so incorporating the Coverdell definition doesn’t have to exclude homeschoolers.
In retrospect, it makes sense that “as determined under state law” would refer to education instead of school. For starters, Coverdell’s definition of school is circular: “The term ‘school’ means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.” The only way this makes sense is if “school” is being used generically as a place where education is provided, and it’s the state definition of education that matters.
Plus, many states do not define “school” independently. There are definitions of private/religious/nonpublic/home schools and definitions that apply to specific sections of law, but many don’t have a generic state definition of “school.”
Beyond these flaws in the logic that eligibility hinges on a state definition of school, there are many reasons why Treasury shouldn’t exclude homeschoolers based on how their state defines homeschooling. It would be very complicated since some states have multiple paths to homeschool, some of which are considered a “school” and some of which are not.
Importantly, the Educational Choice for Children Act, a precursor to the FSTC program, included homeschoolers regardless of state definitions. Remarks by its sponsors emphasized that inclusion.
As the proposed rule acknowledges, Congress defined eligible students and qualified expenses very broadly. Ironically, while the proposal forbids states from “limiting the type of school that scholarship recipients may attend or the types of qualified elementary or secondary education expenses for which scholarship funds may be used,” the proposed rule itself is doing just that. Through its regulatory definition of “school,” Treasury would limit the schools and expenses that qualify beyond the limitations Congress expressly included in Section 25F.
While people often think of school as a specific type of building where children are taught, the reality is much broader than that. The Coverdell definition of school—defined by the education taking place rather than a certain building—appears to recognize that. Treasury’s FSTC rules should as well.
