The governor of Goiás’ criticism of the Tax Reform – 07/21/2023 – Marcos Mendes

The governor of Goiás has been emphatic in his criticism of the Tax Reform. It is worth analyzing its main arguments, published in an article in the Brazil Journal.

He initially states that it is a “reform made from the top down”, little discussed and that “states and municipalities were excluded from the discussion”. Now, the reform has been discussed for more than two decades, with the National Congress and Confaz as a forum for debates, both institutions with strong representation of state and municipal interests.

The concern with safeguarding states and municipalities is in several parts of the text: regional development fund, slow transition, preservation of tax benefits already granted.

Society participated, with non-profit organizations, professional associations, tax specialists, economists. The final text of the Chamber was largely negotiated by the rapporteur.

The governor also defends the fiscal war, claiming that the reform prevents the states from implementing development policies. He shares the idea that states should be free to change the taxes they charge in order to attract business.

There are those who argue that this would induce state and municipal governments to be more efficient, as they would have to meet the demand for public services with less revenue, limited by competition with other jurisdictions.

Barry Weingast and other authors already showed, in the 1990s, that one of the necessary conditions for fiscal competition between states to increase the efficiency of the public sector is that subnational governments bear 100% of the cost of the benefits they grant. In this case, there would be a limit beyond which the state or municipality would have nowhere to draw money to finance its public policies.

This is not the case under the current ICMS regime. The state granting the benefit does not bear the loss of revenue. It pushes the cost to the other states, in interstate transactions. State A allows the company not to pay the tax. When this company sells to a company located in state B, the buying company will have the credit for the unpaid tax, and will deduct it from the tax paid to state B. State B will receive the lowest, as a result of the benefit granted by state A.

With the reform, the states will be able to compete fiscally, but they will have to pay the cost of the benefits they grant. This can be done by setting a lower rate for the IBS charged locally, or by including subsidy expenses to companies in the budget. It will become more transparent who the beneficiaries are and who pays the bill, without passing the cost on to others.

The governor also claims that the reform will “take away the autonomy of states and municipalities”, which will not be able to have their own legislation for the new tax. It so happens that the existence of 27 different legislations for ICMS, each time more complex, increases the cost of paying taxes and tax litigation.

A simplifying reform should unify the tax legislation for the entire country. There will certainly be a reduction in local freedom to legislate. But because today’s freedom is excessive, which has led us to a chaotic system.

Finally, contrary to what the governor alleges, I am not aware of any evidence that the fiscal war has reduced regional inequalities. What the data show is that per capita income in the Midwest approached that of the South-Southeast as a result of the agricultural boom. A classic formula for economic growth: technological innovation, opening up to the outside world, deregulation and taking advantage of comparative advantages. Tax breaks play a minor role, if any.

Meanwhile, per capita income in the North and Northeast has not been able to approach that of the South-Southeast, despite 70 years of regional development policies and at least 30 years of fiscal war.

Such a comprehensive reform has several points that require attention and raise concerns, such as the growing number of privileged treatments and tortoises. None of them criticized by the governor.

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