The budget reconciliation bill passed by the House last month, the “One Big Beautiful Bill Act, ” contains an unconventional provision establishing an unprecedented tax shelter designed to shift resources from public schools to wealthy people and private schools.
The provision allocates $5 billion a year in federal tax credits for donors to organizations that provide private and religious school vouchers. While the bill cuts benefits for other charitable donations, it triples the tax benefit for private school voucher donations.
This unique dollar-for-dollar rebate is something no other charity has ever gotten from the federal government. Other donors may be taken aback to learn that policymakers have singled out private schools for a reward three times larger than what can be received for gifts to pediatric cancer research, flood clean-up or assisting veterans exposed to chemicals.
More alarming still, this provision creates a profitable tax shelter for wealthy people who agree to help funnel public funds into private schools. This is because rich donors will avoid the capital gains tax entirely if they make a gift of stock. Savvy tax advisors will instruct stockholders to avoid selling and to instead donate those holdings, getting a one-for-one return from the federal government — while avoiding hundreds of thousands or millions of dollars in capital gains taxes.
This is the quintessential definition of a tax shelter, encouraging affluent people with no interest in school vouchers to direct contributions this way, not out of conviction but for profit. Usually, when policymakers do this, it is an inadvertent by-product of hasty legislative decisions, not an intentional giveaway. This, too, is a norm being broken with this bill.
The provision expands vouchers nationwide, even in states — such as Kentucky, Nebraska and Colorado — where voters recently rejected vouchers at the ballot box. American voters have actually said no to vouchers in every state where they’ve been put on the ballot, which may be why voucher proponents are sneaking a big expansion into a must-pass federal bill.
Vouchers, in addition to being unpopular, expensive. My organization, the Institute on Taxation and Economic Policy, estimates that this provision alone would as drafted reduce federal tax revenue by $23.2 billion over the next 10 years, or by $67 billion if it is extended beyond its four-year expiration date, as Republicans would likely attempt to do. Because state income taxes largely piggyback on federal law, this provision would reduce state revenue by between $459 million and $1.1 billion over the decade, depending on extension. Of the 10-year state and federal tax cuts from this provision, between $2.2 billion and $5.3 billion would be in the form of capital gains tax avoidance, depending on extension.
Had this provision been in effect in 2021, for example, Elon Musk could have cut his capital gains tax bill by $690 million.
In all, while cutting tax benefits for charities across the board, the reconciliation bill creates an unprecedented giveaway that would enrich the wealthiest Americans, particularly those whose income comes from stock. It would weaken public budgets and public schools, siphoning money to private schools that are allowed to reject many students. Combined with other enormous cuts to public programs and tax cuts for the rich, this is an untenable combination.
Amy Hanauer is executive director of the Institute on Taxation and Economic Policy.
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