States and municipalities speak of a loss of up to R$ 115 billion with cuts in ICMS

Of this total, R$ 27 billion would be revenue losses for city halls, according to the National Confederation of Municipalities.

The package to reduce fuel price in this election year sparked a war of numbers in Brasilia and increased uncertainties for public accounts after 2022. states and municipalities dispute the government’s accounts and say that the package’s losses are in BRL 115 billion.

Of this total, R$ 27 billion would be revenue losses for city halls, according to the National Confederation of Municipalities (CNM). The government accepts, however, to compensate 22.34% (R$ 25.7 billion) through a Proposed Amendment to the Constitution (PEC) that makes an exception in the expenditure ceiling for transfers to governors and mayors.

On the other side of the war and in defense of the measures, the Ministry of Economy released two studies yesterday to show that governors and mayors have the best ability to pay in history.

At the heart of the dispute, the bill (PLP 18), pending in the Senate, sets a ceiling of 17% of the ICMS (state tax) for fuel, diesel, energy, telecommunications, gas and urban transport. The project is considered by governors and mayors a “blockbuster” with no return in the finances of states and municipalities (these receive part of the ICMS) for not compensating for this loss of revenue, calculated at around R$ 80 billion by the National Committee of Secretaries. of the State Treasury (Comsefaz). For this loss, the Minister of Economy, Paulo Guedes, closed the door to future compensation. States are negotiating with senators that the reduction in rates is temporary, according to sources.

The government is also pressuring states to reduce the rate on diesel and cooking gas to zero by December, guaranteeing compensation of up to BRL 25.7 billion, higher than the BRL 22 billion calculated by the Ministry of Economy. In return, the government would reduce federal taxes on gasoline and ethanol to zero.

The pressure is great because the Centrão leaders, who support President Jair Bolsonaro, are putting all their chips in the bet that parliamentarians of all parties will hardly be able to vote against a tax drop that can reduce inflation and that has been adopted by other countries.

The strategy is to publicly expose governors who refuse to reduce diesel to zero in this general election year. In the economic area, the assessment is that flexibility in the spending cap is the lesser of evils. If it doesn’t work out, the president does not rule out declaring a state of calamity, which scared the market even more, which yesterday placed the greatest fiscal risk in 2023 in asset prices.

“Among the alternatives put forward so far, (the package proposal) is the least worst”, says former Treasury Secretary Jeferson Bittencourt, now an economist at Asa Investments. “The calamity would be very damaging.”

According to Estadão, at the meeting on Monday, figures that inflation may fall by 3 percentage points this year, if the entire package is implemented, reinforced the decision.

Ahead of the negotiations by the States, the president of Comsefaz Décio Padilha, rules out that the fall in taxes reaches prices. “If the ICMS is reduced to zero, it does not solve the problem of rising prices at all”, he said. “Any increase you have in diesel as the lag is at 10%, it already consumes the entire weight of ICMS.”

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