Treasury Eyes Tax Axe for Racist Private Schools
Published Date: 9/4/2026
Proposed Rule
Summary
This document contains proposed regulations that would update existing regulations to provide that a private school is not described as an organization exempt from Federal income tax if it discriminates on the basis of race, color, or national or ethnic origin in administration of its educational, admissions, scholarship, athletic, or other policies, based on the fundamental public policy of the United States against such practices. These proposed regulations would affect private schools in taxable years beginning after May 31, 2027, which is after the final regulations are expected to be published.
Analyzed Economic Effects
5 provisions identified: 1 benefits, 3 costs, 1 mixed.
Loss of Tax-Exempt Status for Racially Discriminatory Schools
If a private school adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of educational, admissions, scholarship, athletic, or other school-administered policies, the school will not qualify for exemption from Federal income tax under section 501(c)(3). This rule would apply to private primary and secondary schools, colleges, professional or trade schools, and universities for taxable years beginning after May 31, 2027.
Ban on Race-Based Scholarship Eligibility
The proposed regulations would remove previous language that allowed private schools to favor racial minority groups in admissions, facilities, programs, and financial assistance; race, ethnicity, or national-origin criteria used to allocate scholarships or loans would be treated as discriminatory. The Treasury and IRS estimate the rule may affect about 750,000 students who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity and the 18,000 private schools that currently qualify for tax-exempt status.
Compliance Costs for Private Schools
Private schools may incur legal and administrative costs to revise admissions, scholarship, and loan criteria to comply with the nondiscrimination rule. The agencies note that only a minority of scholarship dollars (no more than 16 percent) are funded by endowments restricted by donor intent, which could require negotiations with donors or heirs to change eligibility criteria.
Impact on Donors and Charitable Giving
The proposed regulations may affect taxpayers who donate to scholarship funds administered by private schools that use race, ethnicity, or national origin as eligibility criteria; donors may shift to alternative criteria such as income, geography, or first-generation status. The Treasury and IRS state they do not have models to quantify how many donors would change their giving.
Religious Selection Criteria Preserved
The proposed regulations explicitly state they would not prevent a private school from selecting students on the basis of religious affiliation or membership, and a religiously based selection criterion does not become racial discrimination merely because members of that religious community may share ancestry or ethnic characteristics, so long as the criterion is based solely on religion.
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Key Dates
Department and Agencies
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