Bolsonaro announces gas tax cut and transfer to states to zero ICMS

In second place in polls with less than four months to go before the elections, President Jair Bolsonaro (PL) decided to react and announced a broad package of up to R$50 billion in measures to try to reduce fuel prices, whose rise is seen by members of his campaign as the main obstacle to reelection.

Three months after zeroing the PIS and Cofins rates, two federal taxes, on diesel and cooking gas until December 2022, Bolsonaro announced the expansion of the scope of the measure and will also exempt federal taxes on gasoline and ethanol. According to the president, the PIS/Cofins and Cide rates will be zeroed.

Pressured by the National Congress, the president also announced that the government is willing to reimburse states that agree to zero ICMS rates on diesel and cooking gas with resources from the Union by the end of the year.

The impacts of the measures were not detailed during the statement. Questioned by journalists, Minister Paulo Guedes (Economy) said that the total cost should be above R$25 billion and below R$50 billion. Government sources, in turn, claim that the cost should be close to R$50 billion.

To pave the way for the transfer of resources, the government will seek the approval of a PEC (proposed amendment to the Constitution) to authorize spending outside the spending ceiling, the rule that limits the advance of expenditures to inflation. The articulation for this PEC was anticipated by the Sheet.​

The PEC emerged as an alternative to the public calamity decree, which was once again defended by the political wing of the government, but faced resistance from technicians in the economic area.

“If there is an understanding on the part of the senators, in approving the complementary bill [sobre o ICMS] and if an amendment to the Constitution were enacted fairly quickly, it would immediately take effect at the end of the line for consumers. So this reduction in the tax burden to face this problem outside Brazil, which has an impact on all of us here”, said the president.

Sources heard by the report say that the exemption of PIS/Cofins on gasoline alone should drain the federal coffers R$ 12 billion, while that of Cide, R$ 1.5 billion, considering the validity of the measure in the second half. The reduction of taxes on ethanol would have an impact of R$ 3.34 billion.

The complementary bill cited by Bolsonaro is the one being processed in the Senate and seeks to establish a ceiling of 17% to 18% on the ICMS rate on fuel and energy. The states, which currently charge rates of 12% to 25% on diesel, have resisted the proposal and tried to negotiate changes.

Within the government, there is talk of an amount of up to R$ 25 billion to compensate states for the loss of ICMS collection, if they accept the additional reduction of taxes until the end of the year. The figure corresponds to what would be the collection of the states with the ceiling foreseen in the project.

“We have zeroed PIS/Cofins since last year and, as long as the governors understand that they can also zero ICMS, we, the federal government, will reimburse the governors for what they will not collect,” Bolsonaro said.

Initially opposed to the increase in expenses to try to reduce fuel, Guedes highlighted that the government seeks to help the population. “It is a cooperative effort between the federative entities. We are transferring resources to the states so that they can transfer a part of their high collection to the population”, he said.

According to the minister, extraordinary revenues that are not yet in the Budget will be used, such as the funds obtained from the privatization of Eletrobras and dividends to be paid by Petrobras.

Bolsonaro is in second place in the polls, behind former president Luiz Inácio Lula da Silva (PT). A new edition of Datafolha showed an expansion of Lula’s advantage over Bolsonaro in the voting intention survey. The PT appears with 48% in the first round, compared to 27% for the president.

Since last year, the rise in fuel prices has been the government’s main concern and has also become the presidency’s re-election campaign.

Earlier on Monday, the president had already stated that the government would announce solutions this week. “Paulo Guedes, I hope that in the next few days he will resolve the issue of fuel in terms of taxes in Brazil. He has already shown himself in favor of this, he has been working on it.”

“I hope that in the coming days, even this week, we will have good news about fuel prices in Brazil,” he said.

In the same interview, the chief executive said that “Petrobras has enormous greed” and criticized the “exaggerated profit” recorded by the state-owned company.

Bolsonaro’s announcement came after a more than two-hour meeting in Planalto, the last after an intense day of meetings. Guedes was in the morning with the presidents of the Chamber, Arthur Lira (PP-AL), and of the Senate, Rodrigo Pacheco (PSD-MG), and with senator Fernando Bezerra (MDB-PE), rapporteur of the project on ICMS.

In the afternoon, technicians from the Economy were at the Ministry of Mines and Energy headquarters to continue the discussions on possible measures.

In the end, all the authorities attended the announcement, with the exception of the presidents of the two Houses, who took a long time to arrive and left Bolsonaro with two empty seats around them. The discomfort of the president and his ministers was visible. “I want to know if Lira and Pacheco are coming,” Bolsonaro asked, triggering a backstage search for the authorities, who arrived about five minutes later.

In the statement, it was not clear from which House the PEC will be processed, nor whether Senator Fernando Bezerra will be the rapporteur. The proposal requires the support of 308 of the 513 deputies and 49 of the 81 senators to pass.

The ICMS exemption had been defined by government officials as a “cannon shot” in prices, which is now reinforced by the exemption of federal taxes on gasoline.

The change in the Constitution is considered the safest way to ensure the transfer of resources to the states outside the spending ceiling without leaving room for questioning and without running into restrictions of the electoral law.

The announcement comes after strong pressure on Guedes to offer a way out of the problem. According to politicians close to the president, if there was no solution for fuel, there could be a new offensive to remove him from office. There is a reading that lethargy in the economy could compromise Bolsonaro’s reelection project.

The calendar has been an opponent of the Planalto’s intentions to remove from paper some measure that contains the price of fuel.

In Congress, allies from the government were emphatic in saying that the government needs to take some action to not let the bill for the increase in fuel and energy tariffs fall on the pockets of the poorest. In recent days, allied leaders have already advocated a new change in the spending ceiling.

In his speech, the president of the Chamber demanded the approval of the measure from the Senate. Pacheco, in turn, said he expected “very soon” a definition regarding Bezerra’s report.

“What is more important, which is to favor the final consumer in relation to the very serious problem that we have today, which is the excessive price we have at the fuel pump”, said Pacheco.

THE MEASURES ANNOUNCED BY THE GOVERNMENT

diesel and gas

PIS/Cofins is already zeroed. Government proposes that governors zero ICMS and the Union would compensate for the loss of revenue.

gasoline and ethanol

Project in Congress creates a ceiling of 17% for ICMS. In addition, the federal government is willing to zero federal taxes (PIS/Cofins and Cide).