Tax reform places Southeast and Northeast on opposite sides

Brazil’s 27 governors are fighting a fierce battle in the Senate over a few points of the tax reform being processed in the House, especially in relation to the governance of the Federative Council, to be created by the Proposed Amendment to the Constitution (PEC) 45/2019. On one side are the more industrialized states, concentrated in the South and Southeast, which want to maintain the criterion of representation in the council according to the size of the population of each unit of the federation, as provided for in the text approved by the Chamber of Deputies. On the other hand, the other states are trying to restore equal weight for everyone, as provided for in the original PEC.

In the council, which has the function of managing the distribution of the future and unified Tax on Goods and Services (IBS), which will replace the ICMS (state) and the ISS (municipal), the equitable weight would benefit the interests of the group of federation units with more members. Although the South and Southeast account for the majority of the population (60%), these regions are home to only seven states. Meanwhile, only the Northeast has nine. Therefore, the majority of governors and mayors complain about the population governance criterion, claiming that the model would limit the autonomy of the federation units and make preferential access to resources from the Union Treasury difficult.

According to the PEC approved by the Chamber, the Federative Council must enjoy technical, administrative, budgetary and financial independence. Furthermore, it must have equal representation from all states, the Federal District and municipalities at its highest level. However, the governance structure includes three levels of veto, and proposals will only be approved if they have, at the same time, the support of an absolute majority of representatives from each unit of the federation and representatives of those with more than 60% of the population. from the country. Finally, the approval of the absolute majority of representatives by a second group, made up of the Federal District and the group of municipalities, will also be necessary.

The inclusion of the requirement for representation of 60% of the population directly benefits states such as São Paulo, Rio de Janeiro and Minas Gerais, which would have greater influence on the body’s decision-making, if the wording is maintained by the Senate. On the other hand, less populous states claim that the rule causes them harm and, therefore, are trying to modify it. The governor of Piauí, Rafael Fonteles (PT), for example, argues that, even though it is a technical body, “the council must reflect parity and equality between federated entities, similar to the Senate”.

Deadlock could postpone the vote on the proposal by senators

Faced with these tensions, the president of the Senate, Rodrigo Pacheco (PSD-MG), confirmed the forecast to vote on the tax reform proposal at the beginning of October, but considered that “nothing will be done hastily”. He bets on public hearings to build convergences between adverse regional interests.

In addition to the so-called federative autonomy, most governors also want to review the methodology and deadline for the transition between fiscal regimes and the size and distribution criteria of the Regional Development Fund (FNDR), financed by the Union and which would reach R$40 billion annually from 2033.

For Arthur Wittenberg, professor of Public Policy at Ibmec-DF, the creation of a Federative Council as a mechanism to manage the IBS, naturally raises controversial questions related to composition and functioning, as the current version tends to favor the most densely populated states, especially those located in the Southeast. “Although there is broad consensus regarding the need for reform, some mayors and governors are openly opposed to certain points,” he said.

According to the expert, their concerns tend to be more receptive in the Senate than in the Chamber, due to two main factors. Firstly, it is the Legislative House with equal representation between the federation units, each represented by three parliamentarians. Secondly, among senators there is a higher proportion of former governors compared to deputies.

In any case, Wittenberg predicts a tense debate, like the reactions provoked by the statements of the governor of Minas Gerais, Romeu Zema (Novo), who defended the political articulation of the South and Southeast to protect the interests of their states in the reform, just as it was already doing the Northeast through a consortium.

“The Southeast, in fact, is the most populous region and the largest tax collector, which raises the question of how it is possible to ignore this fact and give up this position”, comments the professor. Even so, he hopes that, in the end, a consensus formula will be found.

Government and rapporteur rely on the council’s technical approach

The solution proposed by the federal government and the rapporteur, senator Eduardo Braga (MDB-AM), to overcome the impasse between governors is to highlight the strictly technical aspect of the Federative Council, which would mitigate the risk of imbalances and undue favoritism. The governor of Rio Grande do Sul, Eduardo Leite (PSDB), defended, during an event organized by XP Investimentos in São Paulo, an alternative to the design of the Federative Council. He proposed that not only population proportionality be considered (in favor of the Southeast), but that it also not depend solely on a simple majority (in favor of the North and Northeast). “The ideal is to consider blocks of understanding at a regional level,” said Leite, without giving further details.

According to the extraordinary secretary of the Ministry of Finance designated for the reform, Bernard Appy, the council’s duties will be technical, prioritizing the creation of uniform regulations and the correct application of legislation. “The idea is to act in an institutional way, regardless of who has a seat in it, operating like an algorithm”, he exemplified. Despite this, he agreed that the purpose of creating the FNDR is to help reduce regional inequalities and its distribution criteria are political in nature.

The governors of the North, Northeast and Central-West highlighted their annoyance with the loss of parity in the arrangement of the Federative Council during a debate session held in the Senate, on August 29, with the presence of 15 heads of state Executives. According to them, the body should be inspired by the Senate and provide equal representation. “If there is hegemony in one region, we lose the principle of federalism”, complained the governor of Amapá, Clécio Luís (Solidariedade).

For the governor of Goiás, Ronaldo Caiado (União Brasil), the reform was not adequately discussed by the Chamber, but can be better forwarded in the Senate, listening to the states. “It is not possible that, as governor, tomorrow I will receive an allowance from a Federative Council. Everyone wants tax reform to improve. But the way it has been placed, it will bring concentration of power,” he protested.

The vice-governor of the Federal District, Celina Leão (PP), said, during the meeting in the Senate, in which she served as acting governor, that there is “good will” on everyone’s part so that the reform “gives comfort so that we can pay our accounts.” She also defended the egalitarian profile of the council’s management so as to “not escape the federative pact”.

The governor of Alagoas, Paulo Dantas (MDB), defended the sharing of the FNDR according to the criteria of the State Participation Fund, allocating resources inversely proportional to GDP.

Governors of the most populous states avoid confrontation

The governors of the three most inhabited states in the country, which account for 40% of the population, did not participate in the Senate meeting: Romeu Zema (Novo-MG), Cláudio Castro (PL-RJ), and Tarcísio de Freitas (Republicanos-SP). The latter was represented by the vice president, Felício Ramuth (PSD). Freitas was essential for the approval of the reform in the Chamber, on July 7, by managing to overcome resistance from the parliamentary benches of the most developed states. He managed to implement adjustments in the functioning of the Federative Council, which are now threatened. To compensate for these adjustments, the Chamber inserted at the last minute the possibility for states to tax primary and semi-finished products, serving the states of Mato Grosso, Mato Grosso do Sul, Goiás and Pará.

The conflict between the consortia created in recent years to integrate governments in the Northeast, on the one hand, and the Southeast and South, on the other, intensified after the political exploitation of excerpts from the interview with the governor of Minas Gerais, Romeu Zema, to the newspaper The State of S. Paulo, on August 5, in which he defended greater political protagonism for the more developed and populous regions, criticizing the distribution of funds from the federal government. The South and Southeast concentrate around 70% of the national GDP and have around half (255) of the seats in the Chamber of Deputies (513).