R$60 billion Tax Reform Fund benefits Bahia, São Paulo and Minas; Midwest complains – 10/26/2023 – Market

Bahia, São Paulo and Minas Gerais should be the states most covered by resources from the FNDR (National Fund for Regional Development), if the criteria for dividing the funds inserted by the Tax Reform rapporteur, senator Eduardo Braga (MDB-AM) prevail.

Together, these three states would receive R$13.4 billion of the R$60 billion to be contributed annually by the Union from 2043.

Transfers, however, will begin in the coming years. It will be R$8 billion from 2029, with gradual growth thereafter. But the distribution criteria are the same, regardless of the value.

According to the text, 70% of the resources will be divided based on the coefficients already used in the FPE (State Participation Fund), which favors those with lower per capita income. The other 30% will be distributed based on population.

Based on this model, Bahia, São Paulo and Minas Gerais have the largest shares of the FNDR, while Mato Grosso, Espírito Santo, Mato Grosso do Sul and Distrito Federal have the smallest.

Estimates were obtained by Sheet based on the criteria established in the PEC (proposed amendment to the Constitution) of the Reform, population data from the Demographic Census of the IBGE (Brazilian Institute of Geography and Statistics) and the FPE coefficients for 2024 released by the TCU (Federal Audit Court).

Simulations carried out by the states themselves and circulated in messages following the release of Braga’s opinion show a similar configuration of states that are most and least covered.

The definition of the parameters for the distribution of resources in the PEC was an attempt to appease the governors’ dispute over the issue.

States in the Southeast and South lobbied to prevent the FPE from being adopted as a single criterion, which would harm these regions. The incorporation of the population criterion benefited a large part of these areas.

São Paulo, for example, has 21.9% of the population, enough to guarantee R$4 billion of the total R$4.4 billion to which it will be entitled according to the current opinion.

Minas comes next, with 10.1% of the inhabitants, but as its FPE is also relatively high, the composition is more balanced (R$ 1.8 billion according to the population criterion, R$ 2.24 billion using the coefficient).

However, the reconfiguration of winners and losers ended up intensifying the dispute even more.

Representatives from the Central-West, which has a higher per capita income but low population density, are among the opponents, since both formulas harm the states in the region.

“FPE and population are criteria that cannot meet the financing needs for infrastructure in the Central-West, one of the main objectives of the Regional Development Fund”, says the Secretary of Finance of Mato Grosso, Rogério Gallo.

According to the simulations, the state would be left with R$1.1 billion, equivalent to 1.84% of the amount.

The secretary argues that Mato Grosso has 32 thousand kilometers of state roads to maintain and another 20 thousand kilometers to pave, but will still receive one of the smallest transfers from the fund.

Furthermore, according to him, the state tends to lose revenue with the extinction of the ICMS and the migration of taxation to the destination, where the goods are consumed. As the region produces more than it consumes, the current model, with taxation at origin, is more beneficial.

“The question that remains is the following: is it sustainable to leave a state without resources to face the maintenance and expansion of an infrastructure that is used to transport more than 100 million tons of grains? It is clear that we will have a collapse of the state’s road infrastructure in long term due to lack of resources, if we do not have a better distribution of resources from the development fund”, he states.

The secretary says that the states that felt harmed will negotiate in the Senate the inclusion of other criteria that meet states that are producers and have small populations.

The FNDR will be used by states to grant local incentives within the new tax system, which will unify PIS, Cofins, IPI, ICMS and ISS into two new taxes: the federal CBS (Contribution on Goods and Services) and the IBS (Tax on Goods and Services), from states and municipalities.

The new model makes it impossible to continue using current procedures, such as exemptions and presumed credits, as the rules will be standardized. Therefore, the FNDR is a way to ensure budgetary resources so that states and municipalities maintain instruments for granting new incentives from now on.

As shown by Sheet, Braga had already signaled to senators on Tuesday (24) the increase in the amount to R$60 billion. The amount is R$20 billion greater than the initial R$40 billion proposed by the Ministry of Finance. In practice, it represents an increase of 50%.

The text approved by the Chamber provided for progressive values ​​for the FDR, starting at R$8 billion in 2029 and increasing by another R$8 billion per year, until reaching R$40 billion annually from 2033.

According to the rapporteur’s proposal in the Senate, the extra increase of R$20 billion will be distributed over ten years. From 2034 onwards, there will be an increase of R$2 billion per year, until reaching R$60 billion in 2043. The PEC also includes mechanisms for correcting these values ​​for inflation.

The new values ​​were agreed with the Ministry of Finance to unlock the progress of the reform.

Governors demand an even greater transfer, of R$75 billion per year, but the Treasury’s assessment is that an amount in this range is not consistent with the commitment to fiscal responsibility.

When detailing his opinion this Wednesday (25), Braga stated that he will still discuss the topic with governors and parliamentarians within the scope of the Senate’s CCJ (Constitution and Justice Commission). “Let’s see what the governors will present,” he said.