States have room to cut taxes without harming public policies, says Economy

Amid the struggle between the Union and states for the reduction of taxes on fuel, the Ministry of Economy prepared a study to show that governors have room to cut taxes without harming public policies.

In the 2020-2021 biennium, the average annual growth of state and municipal tax revenues was 6.2%, after discounting the effect of inflation. Spending on wages and interest, in turn, fell by 2.2% and 16.8% in the same period, respectively.

The head of the Special Advisory for Economic Studies, Rogério Boueri, says that there are indications that part of this revenue gain will be permanent.

In addition, according to the Economy, even with the more acute effects of the pandemic in 2020, there has been no change in the trend of growth in the revenues of regional governments, which have reinforced their cash.

“What are the states going to do with this extra money?” asks Boueri, citing two possibilities. One of them would be to maintain income transfers to the poorest, as some measures created during the pandemic are temporary. The other is to reduce taxes, reaching the population as a whole.

The impact of reducing taxes on the funding of policies in areas such as health and education has been the argument of governors and finance secretaries to criticize the Jair Bolsonaro (PL) government’s attempts to cut tax rates.

The Secretary of Finance of Pernambuco, Décio Padilha, who coordinates Comsefaz (National Committee of State Secretaries of Finance), says that states have already lost BRL 16 billion with the freezing of fuel taxes from November 2021 to April 2022. By the end of the year, the loss will reach R$ 37 billion due to changes in ICMS approved in March.

“This escalation of increase is linked to a conjunctural issue, and the conjunctural problem is not resolved with a structural solution, which is a tax. ICMS represents 70% of everything [que estados arrecadam]is the most important tribute and has links with health and education”, says Padilha.

This Monday (6), the federal government announced that it intends to cut federal taxes on gasoline. Since March, the PIS and Cofins rates on diesel and cooking gas have been zeroed.

The government also wants to approve a PEC (proposed amendment to the Constitution) that allows the Union to partially reimburse the states in exchange for them to zero ICMS rates on diesel and cooking gas by the end of the year.

Governors view the proposal with suspicion and criticize the fact that the compensation is only partial. States fear compromising the funding of public policies. In addition, they claim that the measure will not solve the problem of rising prices — it will only drain resources from the states.

According to the government’s proposal, the value of the transfer would be equivalent to the collection of states with a rate of up to 17% on these fuels. Of the 27 states, nine now charge higher percentages on diesel (the highest is 25%), according to internal government monitoring.

A bill that was being articulated in Congress already sought to stipulate the ICMS ceiling at 17% on fuels and other items (energy, collective transport and telecommunications) and the loss of revenue corresponding to this change should not be compensated by the federal government.

“The PLP 18 [que cria o teto do ICMS sobre combustíveis e outros itens] brings a direct impact of around R$ 100 billion in the year”, says Padilha. He criticizes the fact that the PEC, not yet formally presented, does not propose full compensation of these values.

The secretary also says that the loss in collection can compromise education, health services and the transfer to city halls, since there is a link with the amount collected with ICMS. “If the project does not have a text adjustment, it could cause more than R$ 62 billion in direct losses in these activities alone”, he says.

The economics argument, in turn, is that states have fiscal space to absorb the impact of this tax reduction.

Last year, states and municipalities closed the year with a financing capacity equivalent to 2.4% of GDP (Gross Domestic Product), as a result of the surplus in the accounts. For this year, the expectation is that the result will be even better.

Regional governments have accumulated a surplus of R$126.6 billion in the 12 months through April, according to the Central Bank.

“Or do you return [o ganho de arrecadação] for the population in some way, or begins to look for the fiscal standard from 2011 to 2012, which is to give an increase [salarial] and return to that perverse cycle”, warns Boueri.

From 2011 to 2016, the real growth in personnel expenses of states and municipalities was 3.6% per year, on average, while tax revenues increased by 1.3%. In 2016, several states knocked on the Union’s door asking for the renegotiation of their debts, and many had to pay civil servants’ salaries in installments.

“What are they saying is going to happen because of the collection [prejudicar políticas públicas] it already happened back there because of expenses”, says Boueri. “We think that the lack of control of permanent expenses is a much greater risk for financial problems for states and municipalities than the reduction in collection”, he says.

With the improvement of the fiscal situation, many states granted, at the beginning of this year, salary increases for public servants. In São Paulo alone, the state government granted a 20% increase to 346,000 health and safety workers. For the remaining 195,100 employees in other categories, the readjustment was 10%.

The Economy also claims that states are “double-benefited” by revenue growth, as they receive more transfers from the Union when federal revenue rises.

This year, the forecast of regular transfers from the Union to states and municipalities has already grown by R$ 58.3 billion in relation to the original budget forecast.

The Undersecretary of Macroeconomic Policy of the SPE (Secretariat of Economic Policy), Fausto Vieira, says that the tax reduction is reversible, should there be any event in the future that jeopardizes state revenues. The same is true of temporary spending, such as transfers to vulnerable families.

“If the decision is to make structural expenditures, such as salaries, it is more difficult to reverse”, he says.