Tarcísio prepares proposal that increases ICMS by 1.5% in São Paulo

The team of the governor of São Paulo, Tarcísio de Freitas (Republicans), is preparing a bill that proposes a 1.5% increase in the Tax on the Circulation of Goods and Services (ICMS). Although the state government officially denies this possibility, according to the People’s Gazette the proposal kept up its sleeve is ready to be sent to the Legislative Assembly of São Paulo (Alesp), if the Executive hits the hammer on the need to cover some “holes” in the tax reform. In São Paulo, the ICMS base rate is 18%.

Another point studied by the Finance Department is the effect of ICMS on São Paulo’s GDP. Last year, the ICMS burden on São Paulo’s GDP was the lowest in the last ten years. According to the ministry’s projection, this year the state of São Paulo should raise around R$207 billion with the tax.

According to the rules of the Proposed Amendment to the Constitution 45/2019 (tax reform), the revenue of each state between 2024 and 2028 will be the factor that will determine the percentage of total revenue to which each entity will be entitled for the next 50 years, a condition which encourages states to increase collections during this period.

In São Paulo, information about the possible arrival of a bill to increase ICMS was the trigger for the creation of a group of Bolsonarian state deputies at Alesp, to analyze the state government’s agenda separately. Formed by deputies from the Liberal Party (PL), the group is made up of parliamentarians Gil Dinz, Lucas Boce, Major Mecca and Tenente Coimbra.

Deflation, deindustrialization and fuels affected revenue

In addition to the proposed change in tax reform, other factors have harmed São Paulo’s ICMS collection in recent years. This was the case with the 2022 federal law, sanctioned by then president Jair Bolsonaro (PL), to reduce the tax charged on fuel. São Paulo recorded a drop from 25% to 18% in ICMS. That year, the Finance Department had informed that the state of São Paulo would no longer collect R$4.5 billion.

Last year there was an agreement between states and the Union to mitigate the effects of the fuel tax exemption. The federal government announced the compensation of R$26.9 billion to the states until 2026. Part of this amount will be the result of injunctions granted by the Federal Supreme Court (STF).

The deindustrialization process that São Paulo has undergone in recent decades has also influenced ICMS collection. On this front, Tarcísio has been trying to attract new industries to the state of São Paulo and established the State Council for the Promotion of New Industrialization.

“We’re going to bring the industry back to São Paulo and we’re going to see businesses appearing. What we want is for our companies to prosper and see the state more competitive.”

Governor of São Paulo, Tarcísio de Freitas (Republicans)

The country’s deflation was another point that affected ICMS collection in the state, during the most drastic months of confronting the Covid-19 pandemic, which affected the price of goods and services.

Economist points out effects of the increase in ICMS in São Paulo

Joelson Sampaio, an economist at Fundação Getúlio Vargas (FGV), analyzes the advantages and disadvantages of the proposal to increase the ICMS that is being managed by Tarcísio. “The negative is the short-term increase in ICMS, we already have a significant burden. Tax increases are always bad for companies. But it could have this positive side of contributing to future protection due to tax reform.”

Sampaio assesses that the tax reform should have a limited impact on the state of São Paulo. “It is expected that there will be a positive impact, such as the end of the tax war. This is something that has really harmed São Paulo: the departure of some companies”, he says.

The professor considers that there is an expectation that other states, by increasing the ICMS, will also increase their participation in the “cake” and this will affect the division of the ICMS after the tax reform. “The big challenge that the state of São Paulo has is trying to maintain this share of the ‘pie’ so as not to have future losses. And that is why the idea of ​​a project to increase the ICMS arises”, says Sampaio, who defends tax reform , but raises an alert: “The balance tends to be positive, but it will depend a lot on how other states also react to the change in tax reform”, points out Sampaio.

Cosud took a stand against linking revenue with ICMS

In November, the Finance Secretaries of São Paulo, Espírito Santo, Minas Gerais, Paraná and Rio Grande do Sul, members of the South and Southeast Integration Consortium (Cosud), signed a letter asking federal parliamentarians to reevaluate the ICMS in the tax reform .

“The collection of states with ICMS over the next 5 years will significantly condition their tax revenues in the subsequent 50 years, creating a strong incentive for them to increase their collection between 2024 and 2028, for example, by carrying out of tax credit recovery programs or increases in ICMS modal rates”, says an excerpt from the statement, from Cosud. However, the tax reform did not meet the wishes of these states.