82% of municipalities and 60% of states will benefit from tax reform

A study by the Institute for Economic and Applied Research (Ipea) released this Monday (28) points out that 82% of Brazilian municipalities and 60% of the states will benefit if the tax reform advances in the Senate without changing what was approved by the Chamber of Deputies in beginning of July.

The analysis was published the day before a meeting of the country’s 27 governors with the president of the Senate, Rodrigo Pacheco (PSD-MG), to discuss the project and listen to the demands – and questions – from each unit of the federation. This is because some states will have their collection impacted by changes due to the transfer of ICMS collection from origin to destination.

The government expects to enact the tax reform by December. Pacheco says that the Senate will approve the proposal that is “possible”.

The study, entitled “Redistributive impacts of the tax reform: updated estimates”, was carried out taking into account the 26 states and the Federal District, and each of the 5,568 Brazilian municipalities considering the collection values ​​in 2022 as a basis for constructing the estimates ( see in full).

The study examines the effects of proposed changes in the tax system, especially the unification of the Tax on Circulation of Goods and Services (ICMS) and the Tax on Services (ISS) into a new tax on goods and services. This new tax would direct the collection to the place of consumption, as opposed to the location of the companies.

Sergio Gobetti, one of the authors of the study together with economist Priscila Monteiro, explains that “if the tax is levied on consumption and is paid by consumers, nothing more fair and natural than this tax returning to the place where the people who paid for it live. him”, in an interview with the newspaper The state of Sao Paulo.

According to Ipea, the municipalities with the lowest Gross Domestic Product (GDP) per capita would benefit most from the change. Around R$50 billion, or 21% of municipal revenues, would be redistributed, favoring 82% of cities in Brazil, which are home to 67% of the population.

The state of São Paulo and its capital are among the potential “losers”, with -14%, however, thanks to an established transition rule, none of them would experience an effective loss of revenue. Of the “45 very rich cities”, 74% are expected to gain from the reform.

“To get an idea of ​​the redistributive effect of the change in the municipal tax, we estimate that a total volume of BRL 36 billion (one third of the revenue of BRL 107 billion) would change hands with the replacement of the ISS at origin by an IBS [Imposto sobre Bens e Serviços] in destiny. And two-thirds of this migration of resources originates in 45 very wealthy cities in São Paulo (big and small), which is redistributed to other municipalities in São Paulo and the rest of the country”, emphasizes the study.

The results suggest that tax reform, by promoting revenue redistribution, would reduce inequality between municipalities by 21%, as measured by the Gini index.

Potential losses would be offset by total collection, says Ipea

The Ipea study also highlights that the current distribution of revenues between municipalities generates extreme disparities, and proposes a fair and equitable restructuring, with greater focus on consumption locations. This explains why the percentage of benefited states (60%) is lower than that of municipalities (82%).

The study identifies six potentially “losing” states, but the simulations indicate that none of them (as well as any capital) would suffer a reduction in revenue due to the approved 50-year transition rule: Amazonas, Espírito Santo, Mato Grosso, Mato Grosso do Sul, São Paulo and Rondônia.

“The only units of the federation in which the percentage of winning municipalities is less than 50% are Espírito Santo, Mato Grosso and Mato Grosso do Sul, which stems from the greater relative loss with the change in ICMS – the share of these states in the new tax is significantly lower, which ends up also impacting the municipal share”, states the study.

The loss of collection is avoided, according to the researchers, because the transition rule establishes that, in the first decades, most of the revenue will continue to be distributed by the existing rules.

The study also evaluates different economic scenarios, concluding that even in pessimistic growth scenarios, underperforming states and capitals would still experience an increase in revenues.

In the case of Goiás, for example, the difference in per capita income between the richest city (Alto Horizonte) and the poorest (Santo Antônio do Descoberto) reaches 127 times, but this difference would drop to four with the implementation of the tax reform .

In 25 years, in the middle of the transition, half of the resources would continue to be distributed as they are today and the other half would be destined to the place of consumption. In addition, a compensation fund made up of 3% of the revenue from the new tax would also strengthen the finances of states and municipalities considered “losers”.

“In most cases, the smaller part of the pie for some federal states will be compensated by the growth of the pie itself, even in pessimistic economic growth scenarios”, says Gobetti.

According to the study’s simulations, in a more pessimistic growth scenario, with a GDP growth of just 1.5% per year, well below the historical average, the states and capitals with the worst performance would still see an increase in their revenues of at least 0.9% per annum.

For the agency, despite losses, the drop in revenue would be less pronounced

In this pessimistic scenario, only 32 Brazilian cities would run the risk of ending the transition with less revenue than they currently have. These cities include wealthy locations that are home to oil refineries or hydroelectric plants, such as Paulínia (SP), São Francisco do Conde (BA), São Gonçalo do Rio Baixo (MG) and Alto Horizonte (GO), all with per capita far above the national average. No capital would have a drop in revenue.

Gobetti also points out that, however, even these cities would not experience a sharp drop in revenue. “It will be a slow process of accommodation of its revenues to the new reality, without risk of discontinuity of public services”, he added.

At the other end of the spectrum, the study suggests that poorer cities on the outskirts of capitals would be largely benefited, such as Carapicuíba (SP), São Gonçalo and São João de Meriti (RJ), Novo Gama and Águas Lindas de Goiás (GO), Alvorada and Viamão (RS), Ribeirão das Neves (MG), among others.

“In a reasonable time horizon, such as the first twenty years of the tax reform, it is possible to guarantee that no state will have a result for its collection significantly worse than what would be observed without the reform, and it is even more likely (under scenarios that incorporate the gains productivity of the reform) that all states have greater or lesser gains in the first two decades of the transition”, completes the Ipea study.