Why project to reduce fuel prices may not work?

In the coming days, the Senate should put to vote a bill that establishes a maximum percentage for charging ICMS (Tax on the Circulation of Goods and Services) on fuel, energy and other essential inputs. The project is yet another attempt supported by the government of President Jair Bolsonaro (PL) to try to control the rise in fuel prices.

With just over four months to go before the elections, Bolsonaro has been expressing concern about the increase in the price of gasoline, diesel and cooking gas. He appears in second place in the main polls of voting intention, behind former president Luiz Inácio Lula da Silva (PT). According to a survey by Datafolha in March this year, 68% of Brazilians associate the rise in the price of the product with the president.

But experts and managers heard by BBC News Brasil point out that the eventual implementation of the project may simply not have the effect desired by the government and, on top of that, have side effects in areas such as education.

According to them, establishing an ICMS ceiling on fuel does not guarantee that the price of gasoline will drop proportionately at gas stations because this tax relief can be pocketed by companies operating in the sector.

They also state that, as Petrobras monitors the price of oil on the international market, new external pressures on the product may raise fuel prices again.

fuel crisis

Fuel prices have been increasing sharply in Brazil in recent years. According to the ANP (Agência Nacional do Petróleo), between March 2021 and March 2022, the average price of a liter of gasoline increased by 29.8%, from R$5.59 to R$7.26.

This increase was the result, in part, of the increase in the price of oil in the international market, in the last year. According to Ipea (Institute of Applied Economic Research), the price of a barrel of Brent type was quoted at US$ 65 (R$ 311.6) in May 2021. In May of this year, the price reached US$ 115 ( BRL 551), an increase of 76%.

With the increase in fuel prices strongly affecting the country’s official inflation, the government began to look for ways to lower the price of the product. President Bolsonaro’s actions in this area were divided into two main fronts. In one, he has frequently changed the command of Petrobras. This year, there were three exchanges. The changes have been seen as a kind of pressure for the state-owned company to change its fuel price policy, which is currently in line with the international market.

On the other front, Bolsonaro zeroed, in 2021, federal taxes on diesel oil and cooking gas. In recent weeks, the political wing has started to study other alternatives such as a PEC (Proposal for a Constitutional Amendment) to subsidize fuel prices and even reissue a public calamity decree that allows the government to act with more freedom to spend public resources on this The end.

In addition, Bolsonaro also began to publicly pressure state governments to reduce ICMS on fuel. And this is exactly the tribute that is at the center of attention of the project that should go to the vote.

tax ceiling

The bill establishes that fuel, electricity and telecommunications services are essential inputs and, therefore, states could only charge up to 17% ICMS on these products. ICMS is a tax levied by the states, that is, its resources go directly to the state coffers.

If the bill becomes law, states that charge more than 17% of ICMS on fuel will have to limit the charge to this percentage. Rio de Janeiro, for example, has a 34% tax on fuel. If the bill goes into effect, the state will have to cut that percentage in half and charge a maximum of 17%.

“Our idea is to reduce the price of fuels and of these other products for the final consumer. In the case of fuels, this has a broad effect because their rise influences the rise of several other products”, says Deputy Danilo Forte (PSDB-CE ), author of the project.

Calculations made by Comsefaz (National Committee of State Finance Secretaries), however, estimate that the cut could generate a loss of up to R$ 83.5 billion to states and municipalities throughout Brazil.

Specialists heard by BBC News Brasil say that there are no guarantees that this reduction in ICMS can, in fact, reduce the price of fuel as desired by the deputy and the government of President Bolsonaro.

new boom

For the specialist in the tax area of ​​the consultancy Mazars, Luis Carlos dos Santos, the establishment of a ceiling for the ICMS does not solve the cause of the rise in fuel prices: the price policy adopted by Petrobras, aligned with the fluctuations in the price of oil in the international market.

“I understand that the project may not work because prices are linked to the foreign market. If there is a new “boom” in oil prices, it will not be the change in ICMS that will allow a reduction or maintenance of a lower price at pumps”, explains the consultant.

Among the factors that helped push up the price of oil on the international market this year is Russia’s invasion of Ukraine. The war in Eastern Europe began on February 24 and has lasted more than 100 days. Since its inception, the price of a barrel of Brent type has gone from approximately US$ 100 (R$ 479.50) to peaks of US$ 121 (R$ 580.20). Prices have fluctuated, largely because Russia is one of the world’s biggest producers of oil and natural gas. The conflict has caused market nervousness over the ability to supply the product amid sanctions that countries such as the United States and the European Union have imposed on Russian oil.

“Without touching the root of the problem, which is Petrobras’ pricing policy, there may be some new external shock that pushes the price up. And then the government runs a huge risk of spending political capital on the eve of the elections and the measure is a shot in the foot”, said professor Carlos Eduardo Navarro, a researcher at the NEF (Nucleo de Estudos Fiscales) at FGV (Fundação Getúlio Vargas), in São Paulo.

“We run the risk of reducing ICMS now and, tomorrow or later, we will be facing a new peak and we will have to discuss other ways to reduce fuel prices”, completes Navarro.

Lack of control

In addition to the risk of a new “boom” in oil prices, experts point to another factor that may make the reduction of ICMS not have a concrete impact on fuel prices. They claim that there is a possibility that this reduction in the tax burden may be “pocketed” by companies operating in the fuel sector.

“The government’s premise is that if we reduce the tax by 10%, the price should drop in that proportion. But this drop may not happen. What may happen is that companies incorporate this reduction in their profit margins. instead of passing on the reduction to the consumer, they continue to charge the same price and profit from the difference”, explains Navarro.

The FGV professor explains that there are several studies on sectoral exemptions carried out by the federal government over the years that show that, in a significant part of the cases, tax reductions did not have the desired effect.

“The problem is that, if, on the one hand, the government can support the reduction of taxes, on the other hand, it cannot force the gas station to apply this reduction in the tax burden. Therefore, this type of mechanism is inefficient”, said the teacher.

“There is no guarantee that it will work. We have no way of knowing whether agents will pocket this reduction or not. The literature on the subject shows that it is much more common that there is no effect or that the effect is minimal,” said Navarro.

Luis Carlos dos Santos, from Mazars, also considers that there is a risk that companies will simply incorporate the reduction of ICMS on fuels into their profit margins.

“If this (price reduction at pumps) does not happen, the legislation will not be fulfilling its objective”, said the consultant.

One of the most studied examples of the failure of tax reduction policies is the payroll tax exemption made between 2012 and 2015 in an attempt to encourage the resumption of economic growth and reduce the unemployment rate.

In 2018, a study published by IPEA showed that the exemption had no significant impact on the maintenance or generation of employment in that period.

“Despite the positive intentions of the exemption law, it can be said that, by the ex-post evaluations (based on knowledge) already carried out […] there is no robust evidence of real positive effects of the exemption”, says an excerpt from the research.

One of the economists who participated in the study was Adolfo Sachsida, appointed by Bolsonaro as Minister of Mines and Energy in one of the movements to try to contain the price of fuel.

BBC News Brasil sought out the ministry and asked if Sachsida was in favor of reducing the fuel tax, but the agency’s advice did not respond.

Asked about the risks pointed out by experts heard by BBC News Brasil and criticism of the measure, the Ministry of Economy said it would not comment on the matter. The Planalto Palace did not respond to the questions sent.

Side effects

Added to the risks pointed out by experts, the reduction of ICMS on fuels may have direct impacts on sensitive areas of public administration in the states, such as education.

This happens because, according to the Constitution, at least 20% of all that is collected by the states with ICMS has to feed Fundeb (Fund for the Maintenance and Development of Basic Education) comes from the collection of ICMS.

In some states, however, the participation of ICMS in the composition of Fundeb is much greater than that. According to Consed (National Council of Secretaries of Education), in Rio de Janeiro, this percentage is 90%.

The non-governmental organization Todos pela Educação released a technical note last week pointing out that the reduction proposed by the project could result in a loss of R$ 16 billion a year in resources for education throughout Brazil.

The project has already caused tension between governors and the economic team. During his time at the World Economic Forum in Davos, the Minister of Economy, Paulo Guedes, attacked the governors who were against the measure.

“You can play there… in the states that are complaining, the governor is either unprepared or ungrateful”, said Guedes.

On the other hand, the president of Consed, Vítor Ângelo, says that the reduction of ICMS counterbalances an uncertain benefit (reduction in fuel prices) with a certain loss: the loss of resources for education.

“Of course, we are in favor of a reduction in fuel prices. But we understand that this cannot happen to the detriment of education, especially at a time when the pandemic is back, when all our resources should be focused on this” , says the president.

Vítor Ângelo says that, if the reduction takes place, states and municipalities will face difficulties in maintaining the existing structure and making investments in the area.

“Without these resources, it will be difficult to hire new teachers, build or renovate schools. There will be states and some municipalities that will have many problems to invest in improvements or even implement the new basic education floor, announced recently”, says the president.

Deputy Danilo Forte argues that the alleged losses pointed out by Vítor Ângelo would be offset by the increase in consumption of other products.

“If we reduce the price of fuel, this will have an impact on other areas, it will reduce other prices and increase the collection at the other end. There will be no such damage that they are talking about”, said the parliamentarian.

Professor Carlos Navarro, on the other hand, refutes this thesis.

“This idea makes no sense. Nobody is going to start refueling their car just because the price has dropped. The routes people take will remain the same. Another problem is that all this discussion is not being done based on robust studies. emergency and they want to solve it”, says the professor.