Public financial management policies: issues of taxation, budgeting and public debt management

Abstract

The "Tax on the Movement of Goods and Services (ICMS)" is the most important State Value Added Tax in Brazil. According to the Brazilian Federal Constitution (1988), each State Government has the autonomy to define specific criteria for sharing ICMS tax revenues with their municipalities. Using this possibility, seventeen Brazilian States introduced different environmental criteria in the definition of the distribution to the municipalities of the resources collected as ICMS, named Ecological ICMS (ICMS-E). Therefore, municipalities presenting better environmental performance receive more resources, considering parameters such as protected areas for conservation, Indigenous lands, sanitation, and solid waste disposal management. The idea of this policy scheme is to encourage municipalities to improve their own environmental performance in order to obtain a higher transfer of ICMS. In theory, this should lead to higher local spending on environmental management and protection. However, the resources received by the ICMS-E are not tied to the need for environmental expenditures, and part of the municipality's environmental performance score is independent of its direct action, such as when there are state or federal Conservation Units in its territory. Since there is no mechanism that ensures that the largest transfer of ICMS-E will mean greater effort for local environmental management, it is possible that the policy does not reach its main objective (to improve environmental conditions in the municipality). This research aims precisely to empirically verify if the ICMS-E can stimulate the adoption of sustainable practices by the municipalities, measured by the volume of environmental expenditures spent by the local government. An analysis was made comparing the environmental expenditures of the municipalities and the volume received from the ICMS-E, in absolute terms and in proportion to their total budget revenue. Two levels of comparison were made: (i) between municipalities of the same state, and (ii) between municipalities of states that have ICMS-E and those that do not. The analysis contemplated the period 2012-2016 and used municipal budgetary data available in the Brazilian Public Sector Accounting and Tax Information System, and in the State Departments of Environment and Finance. The positive correlation between the resources received by ICMS-E and environmental expenditure was proven, and it shows that economic instruments can play a relevant role in making public management more sustainable, and it is necessary to discuss their replication in other fiscal areas. The case of the Ecological ICMS in Brazil shows the potential role that economic instruments can play as a coordination mechanism between different federative spheres in environmental management and, possibly, in other areas of public policy.