State revenues down nearly 10 percent in first half of 2023

Eighteen of Brazil’s 26 states recorded a decline in revenue from the ICMS state goods and services tax in the first half of 2023. 

On average, the decline was 9.32 percent, with the set of states collecting BRL 202 billion against BRL 223 billion in the first half of last year, according to data from the Finance Ministry’s fiscal policy council Confaz. The states of Alagoas, Amazonas, Sergipe, and Tocantins have not yet disclosed H1 data and are not part of the report.

ICMS has always been the central tax for Brazilian state governments, but its collection has been hampered by changes made during the former Jair Bolsonaro administration. 

In March last year, Mr. Bolsonaro reduced ICMS rates on gasoline, diesel, and ethanol by changing tax rules with an eye toward re-election, hoping the measure would ease inflationary pressures and increase his chances of victory. Mr. Bolsonaro’s decree changed the way ICMS is charged, making it a fixed rate per liter of fuel instead of a percentage.

In addition, a few months later, a new federal law capped the rate for essential goods and services at 17 percent. The problem is that this cap affected some of the states’ primary revenue sources, such as fuel, electricity, and communications.

In 2022, the states lost BRL 44.2 billion in revenue due to these changes. In March this year, after extending the fuel tax reduction for a few more months, Finance Minister Fernando Haddad announced a compensation plan for the states. 

The plan complied with a ruling by the Supreme Court in December that the federal government and the states had 120 days to reach an agreement. The court upheld the agreement in June.

According to the agreement, states entitled to receive up to BRL 150 million will get half of that amount this year and the rest in 2024. Those entitled to between BRL 150 million and BRL 500 million will get a third in 2023 and the remainder next year. And those entitled to more than BRL 500 million to receive will get 25 percent in 2023, 50 percent in 2024, and 25 percent in 2025.

For states that are indebted to the federal government, the payment will be made in the form of discounts on their liabilities. In total, the federal government will transfer BRL 26.9 billion in compensation to the states.

Even with the return of ICMS collection on fuels, June saw a drop of 10.48 percent compared to the same month of 2022 for that item.

For 2023, at least 13 states have increased ICMS on products and services from other areas to compensate for the loss of revenue with the cap established in the previous government. But as the new data from Confaz shows, it wasn’t enough.

A few weeks ago, when the tax reform passed the lower house of Congress, the governors were the main opponents of the new rules. They feared losing even more autonomy over local taxes. The loss of revenue is likely to increase pressure on senators, who are now reviewing the proposal.

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