Ecological fiscal transfer (ICMS ecológico) in the brazilian Amazon: experiences and lessons

Abstract

ICMS is a value-added tax on operations related to the circulation of goods and services. It is the most important revenue source for Brazilian states. The Federal Constitution (Brazil, 1988) establishes that states must transfer 25% of the total collected from this tax to the municipalities. Since states have the prerogative to define rules for the transfer of up to 15% of this resource, 16 Brazilian states established legislation creating ICMS transfer criteria based on environmental parameters, called “ICMS Ecológico” (ICMS-E), aiming to compensate, stimulate, or reward municipalities with appropriate environmental practices. Each state establishes its priority criteria, and municipalities get their share of the fiscal transfer according to their performance. The use of ICMS-E resources is not bound to environmental expenditures, but the policy stimulates improvements in local environmental conditions since there is a positive competition between municipalities to improve their relative position in the environmental quality rankings used to calculate the fiscal transfers. The research aims to analyze the adoption of the ICMS-E in Brazilian Amazon states. These states face great challenges in combining environmental conservation and socioeconomic development. They have vast areas of preserved forests, but also high poverty rates and low tax collection capacity. Thus, public policies are needed to induce municipal administrations to consider environmental resources as assets, and not as costs, while strengthening the fiscal capacity of these federal entities. We intend to verify how the ICMS-E helps in this task, analyzing the general characteristics of these legislations, their local differences, and changes and differences over time. The methodology is based on a review of the Amazonian states’ legislation and documents available on the state public administration websites. Some preliminary results of the research are: (i) It is a mature regulatory policy, implemented since the 1990s, with different criteria and methodologies according to local interests. However, it needs to be periodically revised and refined, generating learning in the monitoring of the policy. (ii) Criteria that are evaluated periodically and that allow municipalities a change in the receipt of resources as they improve their environmental performance are relevant to the success of the ICMS-E policy. (iii) Criteria should be defined on issues the municipalities can act on, such as objective parameters of municipal environmental management (% of the territory in protected areas, waste and sewage collection and treatment, staff dedicated to environmental policy, etc.). (iv) Criteria indicators should be simple and easy to monitor, as well as allow municipalities to understand what they need to achieve to improve their transfer. (v) Some states have created ICMS-E Monitoring Councils, composed of representatives of state and municipal governments, and other civil society actors. These Councils have been useful for aligning the different actors who have an interest in the policy. (vi) It can be concluded that the higher the percentage destined for the ICMS-E transfer, the greater the positive response of the municipalities to the state stimulus for environmental preservation.