Team:

Alessandro Melo da SilvaCélia Maria Silva CarvalhoEdna Nazaré Cardoso FarageFernando de Castro Fagundes Janaína GonçalvesJonil Vital de SouzaJosé Carlos dos Santos DamascenoLourdes Maria Porto MoraisLuiz Márcio de Souza Mª Alzenete X. MouraMaria Roseana SoaresPatrícia F. Motta CaféPaula Mª Bandeira CostamilanRivael de Aguiar PereiraRosana Richa Salame

Supervisor: Prof. Sérgio Prado (Unicamp-FGV)Co-ordination: Prof. Fernando Rezende (FGV)

FISCAL FORUM OF BRAZILIAN STATES

Share of Revenue and Intergovernmental Transfers in Brazil

Objective: To analyze and discuss the National resource sharing and transfer system, aiming to identify its results, potential problems, and improvement alternatives.

Focus: Spending capacity of each Federated Entity per Capita (AVAILABLE REVENUE PER CAPITA).

Brazilian Resource Sharing and Transfer System:

• Return Flows:• ICMS Share, Salário Educação (Education Payroll Tax), etc.

• Compensatory Flows:• Kandir Law/ Aux. Exp. (Export Incentive) and IPI (Tax on Manufactured Goods)

– Export.

• Flows for Programs at the national level:• SUS (Unified Health System), FUNDEF/FUNDEB (Education Funds);

• Redistributive Flows:•FPE (State Participation Fund) and FPM (Municipal Participation Fund).

Main Role of Redistributive Transfers:

Mitigate imbalances in spending capacity between jurisdictions.

Current situation:

FPEFPE

• Does not consider other revenues;• Frozen indexes;• Does not adjust to dynamics of tax system.

FPM Considers only population dissociated from income (interior); Population criterion is biased for municipalities with small population.

HORIZONTAL BALANCE (States) - Result in 2005

MAPI

AL PB CE PA AP BA RR PE SE TO AC RN

GO RO MG PR AMRJ SC RS MS MT

SPES

DF

MAPI AL

PBCE

PA

AP

BA

RR

PE

SE

TO

AC

RNGO

RO

MG PR

AM

RJ

SC RSMS

MT SP

ES

DF

0

500

1,000

1,500

2,000

2,500

3,000

Receita Tributária Per Capita RDPC (FPE atual)RDPC (Household Income Per Capita) (Current FPE)Tax Revenue Per Capita

HORIZONTAL BALANCE (States) - Result excluding FPE

MAPI

AL PB CE PA AP BA RR PE SE TO AC RN

GO RO MG PR AMRJ SC RS MS MT

SPES

DF

MAPI

ALPB CE

PA

APBA

RRPE SE TO AC RN

GORO

MG PRAM

RJ

SC RS MS

MTSP

ES

DF

0

500

1,000

1,500

2,000

2,500

3,000

Receita Tributária Per Capita RDPC sem FPERDPC without FPETax Revenue Per Capita

HORIZONTAL BALANCE (Municipalities) - Result in 2005 - Paraíba

0

200

400

600

800

1000

1200

1400

Receita Própria (per capita) RDPC (FPM Atual)Own Revenue (per capita) RDPC (Current FPM)

HORIZONTAL BALANCE (Municipalities) - Result in 2005 - Paraíba

0

200

400

600

800

1000

1200

1400

Receita Própria (per capita) Receita Total Disponível (sem FPM)Own Revenue (per capita) Total Available Revenue (without FPM)

Alternatives for Participation Funds

1 – Unfreezing FPE:

• Makes distribution dynamic;

Would a dynamic redistributive flow (Return to CTN-National Tax Code) properly fulfill the role of mitigating imbalances in spending capacity?

HORIZONTAL BALANCE - Return to CTN

MAPI

AL PA PB CE

BA PE RN TO SE AP ACRR

ROGO PR MG

AMSC RS MS

MTSP

RJES

DF

MAPI AL PA PB CE

BA PE RN

TO

SE

AP

AC

RR

RO

GO PR MG

AM SC RS

MSMT SP

RJES

DF

0

500

1,000

1,500

2,000

2,500

3,000

RDPC sem FPE RDPC (Descong. 2)RDPC without FPE RDPC (Unfreezing 2)

Alternatives for Participation Funds

2 – Equalization Funds:

• Definition:Resource distribution mechanism intended to promote horizontal balance (spending capacity per capita) among the Entities of a Federation.

• Principles:• Open Account X Closed Account• Potential Revenue X Actual Revenue (Tax Effort)• Definition of a REFERENCE VALUE - VR

EQUALIZATION FUNDS

•Equalization Model Analyzed

• Closed Account (FPE/FPM – 2005);• Actual Revenue;• Reference Value:

• Mathematical / statistical method (Mean + Standard Deviation);• Exclusion of Extremes (Mean + or - Standard Deviation);

• Distribution Rules:• 90% Equalization and 10% Tax Effort;• All Federated Entities below VR participate in equalization;• Distribution proportional to resources needed to reach VR;• All participate in the distribution of the tax effort share.

ADVANTAGES:

•Flexible system, which adapts to tax, social, and economic changes;•High technical flexibility;•Its main objective is to equalize the available revenue per capita, thus

promoting horizontal balance;•Dynamic system;•It works as an integration mechanism for the entire revenue

appropriation system;•It gets the best results from the point of view of horizontal balance in

spending capacity of Federated Entities (Available Revenue per Capita).

EQUALIZATION FUNDS

HORIZONTAL BALANCE (States) - FPE Distortions

MAPI

AL PA PB CE

BA PE RN TO SE AP AC RRRO

GO PR MG

SC RS

MTSP

RJ

MA

PI ALPA

PBCE

BAPE

RN

TO

SE

APAC

RR

RO

GO PR MG

MT

AM

MS

DF

ES

VR

0

500

1,000

1,500

2,000

2,500

3,000

RDPC sem FPE RDPC (FPE atual) VRRDPC without FPE RDPC (Current FPE)

HORIZONTAL BALANCE (States) - Equalization (values - 2005)

MAPI

AL PA PB CE

BA PE RN TO SE AP AC RRRO

GO PR MGAM

SC RS MS

MTSP

RJES

DF

MA PI AL PA PB CEBA PE RN TO SE AP AC RR RO GO PR MG

MT

RJ

VR

0

500

1,000

1,500

2,000

2,500

3,000

RDPC sem FPE RDPC (Mod. 6) VRRDPC without FPE

HORIZONTAL BALANCE (States) - Equalization (leveraged)

MAPI

AL PA PB CE

BA PE RN TO SE AP AC RRRO

GO PR MGAM

SC RS MS

MTSP

RJES

DF

MA PI AL PA PB CE BA PE RN TO SE AP AC RR RO GO PR MG

MT

RJ

VR

0

500

1,000

1,500

2,000

2,500

3,000

RDPC sem FPE RDPC (Mod. 6) VRRDPC without FPE

HORIZONTAL BALANCE (Municipalities) - FPM Distortion - Paraíba

0

200

400

600

800

1000

1200

1400

RDPC (sem FPM) RDPC (FPM Atual) Valor de Referência

VR

RDPC (without FPM) RDPC (Current FPM) Reference Value

HORIZONTAL BALANCE (Municipalities) - Equalization - Paraíba

0

200

400

600

800

1000

1200

1400

RDPC (sem FPM) RDPC (Equalização) Valor de Referência

VR

RDPC (without FPM) RDPC (Equalization) Reference Value