On Monday (06/06), President Jair Bolsonaro announced a proposal for an agreement with state governments to reduce the taxes on fuels and, therefore, try to stop the escalation of inflation in the country. Essentially, the agreement consists of removing the ICMS (tax that goes to the states) on diesel and cooking gas; reducing the ICMS and eliminating federal taxes on gasoline and ethanol; and compensating the states and the Federal District for part of the revenue loss. Economy Minister Paulo Guedes stated that an eventual agreement will have a defined term and value. The idea is to keep these rules in force until December 31st of this year, and limit reimbursement to states at an amount to be fixed, between R$25 billion and R$50 billion. In addition to the agreement of the states, the agreement involves the approval of two projects by the National Congress, including a proposal for an Amendment to the Constitution (PEC), which requires broad support in the House and Senate.
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States’ Response
On Tuesday (07/06), the States and the Federal District Finance Secretaries National Committee (Comsefaz) President Décio Padilha said that the proposal to remove the Tax on Circulation of Goods and Services (ICMS) – state tax – would not solve the problem of rising fuel prices at all. He mentioned that in November 2021, the states froze the ICMS tax base on fuels, which has already resulted in a loss of R$16 billion in revenue. However, this did not result in any price reduction so far. The proposal presented by the Government would pay the states the value of losses with the tax zeroed up to the limit of 17%. However, today there are states that charge up to 34% on some fuels, the difference would be lost.
Risks for Experts
For experts interviewed by media outlets, the proposal carries fiscal risks, since the extraordinary revenues necessary to compensate the states are not yet guaranteed. The Government intends to obtain the R$ 50 billion necessaries through the Eletrobras privatization process. They also believe that the proposal will not be enough to guarantee the control of fuel prices, because of the power of the international factors, such as the international price of the oil barrel and the dollar exchange rate. The proposal was also seen as another mechanism to circumvent the spending limit, leading to an increase in future interest rates and the dollar.
