Regional tax reform funds will cost at least R$790 billion

Even if there is no increase in the tax burden due to the change in the consumption tax system, the reform being discussed in Congress will result in a heavy bill to be paid by all taxpayers.

This is because the proposed amendment to the Constitution (PEC) 45/2019, which must be voted on in the Senate in November, provides for contributions paid with federal resources – that is, money from all tax payers in the country – to two funds to support states, which will total at least R$790 billion over the next twenty years. And there is pressure from governors for the value to increase.

Part of this volume should go to a fund to compensate ICMS tax and financial-fiscal benefits, which would total R$160 billion over the next ten years.

The idea is that federal subsidies replace current state incentives promoted through ICMS exemptions, which today cause the so-called tax war. The expected trajectory for the Union’s contributions to this fund is as follows:

• R$8 billion in 2025;
• R$16 billion in 2026;
• R$24 billion in 2027;
• R$32 billion in 2028;
• R$32 billion in 2029;
• R$24 billion in 2030;
• R$16 billion in 2031 and
• R$8 billion in 2032.

The amounts correspond to current values ​​and, according to the proposal, will still be updated annually based on the variation measured by the Broad National Consumer Price Index (IPCA).

The other R$630 billion is promised by the government for the Regional Development Fund (FDR), which will aim to reduce regional and social inequalities with the delivery of resources from the Union to the federative units.

According to the text, the money should be used to “carry out studies, projects and infrastructure works; promotion of productive activities with high potential for generating employment and income, including the granting of economic and financial subsidies; and promotion of actions aimed at scientific and technological development and innovation”.

The Ministry of Finance has so far committed to transferring annual amounts of up to R$60 billion to the FDR until 2043. Just like contributions to the compensation fund, the amounts will be adjusted annually by the IPCA. Payments, in this case, start in 2029 and will evolve as follows:

• R$8 billion in 2029;
• R$16 billion in 2030;
• R$24 billion in 2031;
• R$32 billion in 2032;
• R$40 billion in 2033;
• R$42 billion in 2034;
• R$44 billion in 2035;
• R$46 billion in 2036;
• R$48 billion in 2037;
• R$50 billion in 2038;
• R$52 billion in 2039;
• R$54 billion in 2040;
• R$56 billion in 2041;
• R$58 billion in 2042; It is
• R$60 billion in 2043.

In the version of the PEC approved by the Chamber, the total approved resource contribution was R$ 120 billion and would only go until 2033. The amount was substantially increased in the substitute presented by senator Eduardo Braga (MDB-AM) this Wednesday (25) .

Even so, the National Committee of Finance Secretaries of the States and the Federal District (Comsefaz) is putting pressure on parliamentarians to reach the amount of R$75 billion at the peak of annual transfers.

Braga’s report will be analyzed by the Senate’s Constitution and Justice Committee (CCJ) in the coming weeks and should be voted on by the collegiate on November 7th. Both in the CCJ and in the House plenary, it will still be subject to modifications.

Tax specialist Alexandre Tortato, partner at Tortato Advogados, emphasizes that the funds are political commitments from the government for the approval of tax reform in Congress.

“The question is: will the federal government have a restrictive fiscal policy to withdraw from somewhere to put into these funds or will it take on more debt to be able to pass on these amounts?”, he asks.

Asked about the impact that transfers could have on the Union Budget in the coming years, Braga highlighted that he was based on a study by the Ministry of Finance to project the values.

“That’s why the process is long and that’s why we’re saying that this fund will be formed over not a day, a month or a year, but it will be formed over the years and from the perspective of GDP growth and revenue in relation to GDP”, said the rapporteur, in a press conference this Wednesday.

“All the premises are established in the study by the Ministry of Finance itself,” said Braga. “I was concerned about asking the Federal Court of Auditors to validate the Ministry of Finance’s study,” he added.

Felipe Salto, chief economist at broker Warren Rena, draws attention to the high fiscal impact of the measure and the long period of transition towards taxation at the destination of services and goods.

“Instead of promoting the desired simplification of the tax system, adopting the principle of destination, with brevity, a distant transition was opted for and concentrated in four years (2029-2032), but with a high fiscal cost. If so much budget is to be committed to this matter, it would be reasonable for the transition to at least occur in a much shorter period of time, that is to say.”