Who wants to stall tax reform? – 7/4/2023 – Vinicius Torres Freire

The vote on the tax reform has been in trouble in recent days because at least ten governors want to change the way in which the revenue from the new unified state tax on the consumption of any goods and services will be distributed. That is, the IBS, Tax on Goods and Services, which will replace ICMS and ISS.

Tarcísio de Freitas (Republicanos-SP) and Ronaldo Caiado (União Brasil-GO) lead the pressure. The question is whether this is really the problem, the distribution method, or whether they want to postpone or overthrow the reform. Caiado, incidentally, does not want any state change.

Business lobbies tag parliamentarians hand to hand and are grateful for the opportunity to have more time to dig a favor or even overthrow the reform, as mayoral associations also want.

At public hearings on the subject in Congress, scores of business representatives said they were “in favor of reform” as long as their case was handled in a special way. It looked like a joke.

Yes, sectors that pay less will pay more. This is a goal of the reform. Moreover, given the mess that is the tax system, it is rare for the company to know precisely how much it is paying (because it pays tax embedded in inputs it consumes, without knowing exactly how much and does not have credit, compensation).

For now, the approval of the essential principles of the reform is at stake: a single national model of consumption tax, on added value, non-cumulative, with uniform rates or almost, with few exceptions, the end of local benefits for economic sectors (end of tax war).

There will still be a large and important definition in the complementary law of 2024 that will regulate the change, starting with the size of the rates. Hence also the reason for fears.

The collection and distribution of the IBS would be the responsibility of a Federative Council, made up of states, a great novelty in the Brazilian Constitution and federation. The tax reform defines rules that will guide the Council’s procedures, revenue sharing between states and municipalities, and the transition to the new system, which will take decades.

São Paulo wants each state to continue to take care of the collection and, given the new rules, transfer what they owe to other federative units. This complicates the system, makes it difficult to offset (credits) taxes for companies and, ultimately, can result in defaults.

But certain states fear taking a hit too — at least that’s what two finance secretaries say. Why? The Council will regulate infralegal matters, make collective decisions on disputes and may propose laws to address taxation. These states think that rules can be created that harm them and that “take away their autonomy”. More do not explain.

A central objective of the tax reform is to remove the autonomy of states and city halls to grant favors to companies, to finance businesses via taxes and to create confusing rules. All of these create economic inefficiencies.

A productive investment decision is not based on the principle of the highest return if it takes into account the size of the special tax exemption that it will gain or if it is based on attempts to circumvent the madness of the law in order to pay less taxes.

As much as possible, taxes should be uniform, regardless of the sector, and they cannot jeopardize the calculation of the most profitable productive decision, in economic terms.

Reform is fundamental for the country. Surprisingly, it has the support of tax specialists, businessmen, economists and former senior civil servants, from left to right, the civilized elite, who signed a letter in defense of change, a rare combination to see. Who doesn’t sign? Who wants to keep their special case and bolsonaristas.

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