2. Historical evolution of municipal taxation

The tax burden, in its strictest sense, is nothing more than the simple relationship between the volume of resources collected via taxes and the gross domestic product (GDP) of a given location over a given period of time. Usually, the tax burden is calculated at a national level, considering the total fiscal collection that occurred in the country in a given year. This common and broad approach to the tax burden will not be used in this study; instead, it will restrict itself only to taxes levied by local governments. In other words, the analysis will focus only on taxes that fall within the scope of municipalities and on the intergovernmental transfers they receive—not withstanding eventual comparisons of this type in other levels of government.

The basic source for consultation on municipal revenue is the publication Brazil's Finance (Finbra) from the Brazilian National Treasury (STN). The GDP is obtained by the System of National Accounts (SCN) with the Brazilian Institute of Geography and Statistics (IBGE). For the other areas of government, some other official sources were consulted: Union Balance Sheet (BGU) and Budget Execution of the States (EOE), STN; System S Transfer Report, from the Brazilian Internal Revenue Service (RFB), and the Workers' Severance Guarantee Fund (FGTS) Report, a service of the Federal Social Bank (CEF). Furthermore, information was also obtained from the STN, National Petroleum Regulatory Agency (ANP) and National Electrical Energy Regulatory Agency (Aneel) to compose the database regarding transfers between governments.1

The tax burden of municipalities—from the standpoint of direct collection—is estimated at 2.37% of Brazil's GDP in 2016, which represents approximately 7.2% of the same year's total tax burden. With a clear upward trajectory since the Constitution of 1988, the municipal tax burden of 2016 was the largest ever achieved in the history of the country, surpassing by 1.77 pp., the GDP of 1987, the first year of the National Constitutional Assembly that gave rise to Brazil's current "magna carta." Table 1 presents the evolution of each sphere of Brazilian Government's tax burden, from the viewpoint of direct collection and available revenue, since 1960.

is fundamental for understanding the strong growth of local governments' role in the Brazilian federation—not only through increased revenue, but also due to the fact that local governments have become responsible for implementing much of the country's social policies.

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The significant participation of the municipalities in the public sector's available revenue (around 20%) was achieved due to two decentralising movements provided by the Constitution of 1988: granting tax autonomy (their own revenue) and intensification of intergovernmental transfers. This aspect is important in the Brazilian Federal debate because, as indicated by Afonso and Araujo [5], the idea that the municipalities' revenue has grown since the 1980s

The municipalities' own resources were and have been such important factors to the "fiscal municipalism" in Brazil that in recent years, it is possible to identify an interesting aspect about the direct collection of local governments: the continuing tendency of an expanding tax burden even with the economic crisis that took hold of the country from 2014 [17]. The country's total tax burden has been showing a pattern of contraction since 2011, leading Ribeiro [18] to point out the existence of a structural break in Brazilian tax elasticity with respect to economic performance from the subprime crisis of 2008. Apparently, this break applies to the public

exclusively due to federal and state transfers is not unusual.

Table 1. Evolution of the Tax Burden's Federal Share by level of government, 1960/2016.

sector as a whole, but not specifically for local governments.

At the same time as their own collected revenue increased, the municipalities experienced a substantial rise in intergovernmental transfers: an increase in transfers from the Municipal Participation Fund (FPM), the creation of the Fund for Maintenance and Development of Basic Education and Valorisation of Education Professionals (Fundeb), as well as the expansion of municipal participation from 20 to 25% of the state Tax on the Circulation of Goods and Services (ICMS) collected, were the main events to have contributed to such scenario.

The increase in transfers from the Union and the states made the municipalities' available revenue (direct collection plus transfers) increase from 2.98% of GDP in 1987 to 6.67% of GDP in 2016—a growth not as intense (in relative terms) as in the case of direct collection, but still very expressive and unparalleled in the Brazilian federation. To have a basis for comparison, in the same period, state governments increased their available revenue by 2.86 pp. of GDP, below the 3.68 pp. of local governments. Municipal participation in federal and state revenue

<sup>1</sup> The entire procedure of calculating the tax burden adopted in this chapter follows the "broad" methodology of calculation, which considers all public revenue extracted compulsorily from society by part of the government (federal, state and municipal). In this way, the method used here differs from most of the tax burden estimates by including items such as royalties, economic contributions, tax fines, revenue from active tax debt and others. For more details, see [1].


Table 1. Evolution of the Tax Burden's Federal Share by level of government, 1960/2016.

2. Historical evolution of municipal taxation

248 Taxes and Taxation Trends

The tax burden, in its strictest sense, is nothing more than the simple relationship between the volume of resources collected via taxes and the gross domestic product (GDP) of a given location over a given period of time. Usually, the tax burden is calculated at a national level, considering the total fiscal collection that occurred in the country in a given year. This common and broad approach to the tax burden will not be used in this study; instead, it will restrict itself only to taxes levied by local governments. In other words, the analysis will focus only on taxes that fall within the scope of municipalities and on the intergovernmental transfers they receive—not withstanding eventual comparisons of this type in other levels of government.

The basic source for consultation on municipal revenue is the publication Brazil's Finance (Finbra) from the Brazilian National Treasury (STN). The GDP is obtained by the System of National Accounts (SCN) with the Brazilian Institute of Geography and Statistics (IBGE). For the other areas of government, some other official sources were consulted: Union Balance Sheet (BGU) and Budget Execution of the States (EOE), STN; System S Transfer Report, from the Brazilian Internal Revenue Service (RFB), and the Workers' Severance Guarantee Fund (FGTS) Report, a service of the Federal Social Bank (CEF). Furthermore, information was also obtained from the STN, National Petroleum Regulatory Agency (ANP) and National Electrical Energy Regulatory Agency (Aneel) to compose the database regarding transfers between governments.1

The tax burden of municipalities—from the standpoint of direct collection—is estimated at 2.37% of Brazil's GDP in 2016, which represents approximately 7.2% of the same year's total tax burden. With a clear upward trajectory since the Constitution of 1988, the municipal tax burden of 2016 was the largest ever achieved in the history of the country, surpassing by 1.77 pp., the GDP of 1987, the first year of the National Constitutional Assembly that gave rise to Brazil's current "magna carta." Table 1 presents the evolution of each sphere of Brazilian Government's

At the same time as their own collected revenue increased, the municipalities experienced a substantial rise in intergovernmental transfers: an increase in transfers from the Municipal Participation Fund (FPM), the creation of the Fund for Maintenance and Development of Basic Education and Valorisation of Education Professionals (Fundeb), as well as the expansion of municipal participation from 20 to 25% of the state Tax on the Circulation of Goods and

The increase in transfers from the Union and the states made the municipalities' available revenue (direct collection plus transfers) increase from 2.98% of GDP in 1987 to 6.67% of GDP in 2016—a growth not as intense (in relative terms) as in the case of direct collection, but still very expressive and unparalleled in the Brazilian federation. To have a basis for comparison, in the same period, state governments increased their available revenue by 2.86 pp. of GDP, below the 3.68 pp. of local governments. Municipal participation in federal and state revenue

The entire procedure of calculating the tax burden adopted in this chapter follows the "broad" methodology of calculation, which considers all public revenue extracted compulsorily from society by part of the government (federal, state and municipal). In this way, the method used here differs from most of the tax burden estimates by including items such as

royalties, economic contributions, tax fines, revenue from active tax debt and others. For more details, see [1].

tax burden, from the viewpoint of direct collection and available revenue, since 1960.

Services (ICMS) collected, were the main events to have contributed to such scenario.

1

is fundamental for understanding the strong growth of local governments' role in the Brazilian federation—not only through increased revenue, but also due to the fact that local governments have become responsible for implementing much of the country's social policies.

The significant participation of the municipalities in the public sector's available revenue (around 20%) was achieved due to two decentralising movements provided by the Constitution of 1988: granting tax autonomy (their own revenue) and intensification of intergovernmental transfers. This aspect is important in the Brazilian Federal debate because, as indicated by Afonso and Araujo [5], the idea that the municipalities' revenue has grown since the 1980s exclusively due to federal and state transfers is not unusual.

The municipalities' own resources were and have been such important factors to the "fiscal municipalism" in Brazil that in recent years, it is possible to identify an interesting aspect about the direct collection of local governments: the continuing tendency of an expanding tax burden even with the economic crisis that took hold of the country from 2014 [17]. The country's total tax burden has been showing a pattern of contraction since 2011, leading Ribeiro [18] to point out the existence of a structural break in Brazilian tax elasticity with respect to economic performance from the subprime crisis of 2008. Apparently, this break applies to the public sector as a whole, but not specifically for local governments.

Figure 1. Evolution of the municipal tax burden and its main components, 1980/2016.

Breaking down the municipal tax burden, one can see that it is determined primarily by two taxes: the Tax on Services of any Nature (ISS) and the Property Tax (IPTU). While the first is an indirect tax, levied on the service sector's production, the second is a direct tax on urban real estate. Between 1980 and 2016, these two taxes accounted for, on average, more than 60% of the municipal tax burden. In 2016, this participation was 57.7%. Figure 1 shows the trajectory of the municipal tax burden and its main components since 1980.

According to Afonso and Castro [3], the Brazilian tax burden (total) is markedly characterised by a high incidence of taxes on the sale of goods and services. In fact, the data from the 2016 tax burden point in this direction, as evidenced in Figure 2. However, the picture is significantly

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Despite the taxation on goods and services being pretty close in both cases, the way in which the taxes are levied (direct and indirect) acts slightly differently in the two cases. Adding the base of goods and services to taxation on foreign trade, financial fees and transactions (plus "others"), makes up the framework of indirect taxation in the country—which is usually

The burden of indirect taxation […] is high in Brazil. The so-called indirect taxes, included in the prices of goods and services are collected by third parties, responsible for charging, but effectively borne by final consumers. Such taxes, by their nature, affect consumers indiscriminately, regardless of their level of income. Therefore, mainly the poorest, who spend their entire income on consumption, are encumbered. The ultimate effect of this taxation is highly

As Figure 3 shows, this indirect base has greater importance in the municipal taxation (50.6%) than in the consolidated public sector taxation (45.7%), which could indicate a worse tax

different when the municipal taxation is examined separately.

regressive [28, 29], helping to accentuate social inequalities.

regressive and concentrating [30], p. 85.<sup>2</sup>

Figure 2. Composition of the tax burden by tax base, 2016.

structure in the municipal scope.

Translation made by the authors.

2

Although both taxes present an expansionary trend from a historical perspective, this is most evident in the case of the ISS, especially from 2003 onwards. Some explanations may be suggested in this case: First, the modern economy is leaning increasingly towards the service sector, especially those services of higher added value, related to innovation and technology [19], and, in Brazil's case, especially in metropolitan areas [20]; second, the enactment of Amendment No. 116 in 2003, which increased the activities subject to the ISS; third, the advent of the electronic invoice in local governments, which modernised tax management and supervision [21] and consequently, the revenue collected [22, 23] and fourth, the relatively low IPTU collection in light of its potential [24–27].
