Compensation to states for ICMS cuts could cost the Union up to R$36.9 billion

Compensation to the states for ICMS (Tax on Circulation of Goods and Services) cuts sponsored by former President Jair Bolsonaro (PL) and by Congress on the eve of the 2022 elections could cost the Union up to R$ 36.9 billion, according to calculations of the National Treasury obtained by Sheet.

The federal government made a series of estimates of the amount that would be owed to each of the 26 states and the Federal District and, in the least extreme scenario, the bill would be R$ 13.2 billion. The simulations consider different scenarios and were presented this week to state secretaries and members of the government.

The payment of these reparations can be made through transfers from the Union to the states, instead of debt relief.

There is concern due to the impact of these values ​​on the primary result (without interest) of government accounts. Therefore, the Federal Executive seeks an understanding to dilute the compensation in more than one year.

The Union also tries to limit the impact of the negotiation as much as possible. The federal representatives understand that the “fair compensation” would be from R$ 13 billion to R$ 16 billion.

The payment of compensation by the Union to the states was placed among the main topics on the agenda of the meetings between the 27 governors and President Luiz Inácio Lula da Silva (PT) this Friday (27).

The new government has intensified negotiations to end the stalemate. In December, the STF (Federal Supreme Court) gave the Union and states a period of 120 days to reach an agreement.

The fight began when former president Jair Bolsonaro (PL), who maintained a bellicose relationship with the governors, obtained support in Congress to approve a law that standardized the ICMS rate on gasoline, diesel and ethanol. The text entered into force in March 2022, with the aim of reducing fuel prices in an election year.

State tax was levied at a fixed amount per liter (“ad rem”) instead of a percentage. The measure had a billionaire impact on the states’ cash flow.

Almost three months later, a second law passed imposed an ICMS ceiling on essential items (such as fuel and electricity) and provided for compensation to states that had losses greater than 5% in tax collection. But the wording of the norm left room for different interpretations, and now the way of calculating this repair is the main target of the impasse between the Union and the states.

States advocate estimating compensation specifically for each fuel and making full reimbursement to all states, within or outside the fiscal recovery program for debtors. Thus, the 5% trigger would apply to everyone and trigger the payment of all damages — not just the excess of this percentage, as defended by the Union.

The secretaries also want the losses in 2022 to be estimated on the basis of 2021 corrected for inflation. Without this update, according to them, few states would trigger the compensation, since tax revenues rise naturally, accompanying the price level.

The device of the law, however, speaks of compensation for the loss “that exceeds the percentage of 5% in relation to the collection of this tribute in the year 2021”. The Federal Government’s interpretation is that the compensation should cover only the loss exceeding the 5% drop, calculated on the nominal value of the previous year’s revenues, since the text does not mention monetary correction.

The federal government still understands that the estimate must be made on the ICMS as a whole, globally.

According to the simulations obtained by Sheet, an agreement that complies with 100% of the Union’s interpretations would result in compensation of R$ 13.2 billion. The highest amount would be owed to Rio Grande do Sul (R$ 3.3 billion).

The account estimates the global loss of ICMS on the nominal basis of collection in 2021 and provides for compensation only for losses greater than 5% – only states in the RRF (tax recovery regime) would have full coverage of losses.

Still in this scenario, the correction of the tax base for inflation would increase the cost to R$ 22.4 billion.

If the calculation is specific for fuel, but still prevails the payment of the loss above 5% on the base without correction, the impact is R$ 28.3 billion. Updating the 2021 values ​​for inflation would increase the compensation to BRL 33.4 billion.

This last scenario contemplates the main criteria adopted in judicial injunctions already granted in favor of the states: payment of the surplus at 5%, specific calculation by product and with monetary correction of the basis of comparison.

The state of São Paulo would be the main beneficiary, with BRL 5.86 billion — 17.6% of the total amount of BRL 33.4 billion. Following would come Rio de Janeiro (R$ 4.5 billion) and Minas Gerais (R$ 4.2 billion).

There are also scenarios that include coverage of the full loss for all states — that is, once the trigger is triggered, the Union pays 100% of the amount.

In this case, the cost would be BRL 16.5 billion, considering an estimate of the global value of ICMS and without the correction of the 2021 base. .

If the calculation is specific for fuel, the loss is BRL 31.3 billion (without base correction) or BRL 36.9 billion (with base update of 2021).

The Union disagrees with several of the states’ claims, but may end up meeting one or two items in order to accelerate the outcome of the agreement. The guideline is to verify which of these points would have the least impact on the federal government’s coffers.

The payment method is also being studied. On the one hand, some states have already obtained preliminary injunctions and are reducing their debt installments. The amount compensated so far reaches R$ 9.05 billion.

On the other hand, the federal government has fiscal restrictions to be observed in the case of choosing to transfer to the states —among them the primary result and the spending ceiling, which limits the growth of expenses to inflation.