Brazil’s Rousseff Tries Again to Trim Tax Incentives

Brazil’s Rousseff Tries Again to Trim Tax Incentives

President tussles with lawmakers reluctant to pass unpopular belt-tightening measures

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Brazil’s President Dilma Rousseff tried again on Friday to push tax measures through Congress to help reverse a widening budget deficit.PHOTO: REUTERS

By

PAULO TREVISANI AND ROGERIO JELMAYER – Wall Street Journal

March 20, 2015 5:40 p.m. ET

BRASÍLIA—Brazil’s embattled President Dilma Rousseff submitted a bill to Congress on Friday that rolls back tax incentives implemented in the past few years, opening a new chapter in her tug of war with lawmakers reluctant to pass unpopular belt-tightening measures.

The bill replaces a presidential decree that the leader of Brazil’s Senate rejected three weeks ago, citing a need to defend the Congress’s prerogative to pass legislation. That power struggle has threatened the push for fiscal-austerity led by Finance MinisterJoaquim Levy to reverse a widening budget deficit and avoid a sovereign-credit downgrade to junk status.

Ms. Rousseff’s bill maintains terms of the rejected decree, which raised the social-security tax rate to up to 4.5% of a company’s gross revenue from the previous rate of up to 2%. The revenue-based tax was put in place in 2011 by former Finance Minister Guido Mantega to replace a payroll-based approach in industries where labor represents a large share of production costs.

The new bill also cuts tax refunds for exporters to 1% of total revenue from overseas sales from 3%.

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Joaquim Levy, Brazil’s finance minister, has been tasked with fixing the economy and avoiding a credit-rating downgrade. PHOTO:BLOOMBERG NEWS

Mr. Levy said in February that the combined measures would increase tax revenue by 14.6 billion Brazilian reais ($4.5 billion) this year, helping the government reach the finance minister’s target of delivering a primary surplus, or government revenue less spending before interest payments, of 1.2% of gross domestic product. Hitting the target would reverse 2014’s primary deficit.

A person close to the matter said Mr. Levy, a U.S.-educated banker with little experience in political maneuvering, has joined other members of Ms. Rousseff’s cabinet to meet with congressional leaders to discuss how to get the law passed.

Getting the new bill approved by Congress would be further evidence Mr. Levy is learning to work with legislators.

Last week, he got lawmakers to approve his proposal to break a gridlock over changes to income taxes. The administration’s original income-tax proposal included higher levies on poorer families, a move Congress rebuffed. The minister then ceded ground and proposed raising taxes only on middle- and upper-income families, a change Congress accepted.

“It isn’t clear if Mr. Levy has the skills of a politician…but he isn’t confronting (lawmakers) and that’s good,” said Alex Agostini , chief economist at Austin Rating, a local rating agency based in São Paulo.

Mr. Levy joined the government earlier this year with the economy on the brink of recession, inflation well above target and the biggest budget deficit since the central-bank began tracking the figure in 2002. He was appointed by recently re-elected President Rousseff to fix the economy and avoid a credit-rating downgrade.

But Ms. Rousseff has faced political headwinds after winning by a narrow margin in October. Her leftist Workers’ Party has been reluctant to embrace fiscal austerity. At the same time, her party’s main ally, the Brazilian Democratic Movement Party, or PMDB, has complained it is only asked to approve economic measures, instead of being included in discussions of economic policy.

The political conflict came to a head on March 3, when Senate President Renan Calheirosrefused to accept the payroll-tax decree, momentarily killing a measure seen as fundamental to rebalancing the budget. Government officials, including Mr. Levy, have since met with congressional leaders several times, but the discussions were often kept private.

A spokesman for the Finance Ministry wouldn’t confirm if the payroll-tax measure was discussed in those meetings. A person close to the matter said that it was and implied that it was agreed that no changes were to be made in the bill before it was submitted to lawmakers.

The attempt by Ms. Rousseff’s administration to appease Congress comes shortly after a high-profile showdown in the lower house that could complicate matters. Education Minister Cid Gomes appeared before hundreds of lawmakers in the Chamber of Deputies on Wednesday to explain comments he had made in February that Brazil had “around 300 to 400 extortionists in Congress.”

A heated argument blew up when an unapologetic Mr. Gomes repeated his criticism. He left the building and went directly to the presidential palace to present his resignation to Ms. Rousseff, who promptly accepted.

Mr. Gomes’s exit was largely seen as a victory for Speaker of the House Eduardo Cunha,from the PMDB, an antagonist to Ms. Rousseff largely seen as an obstacle to the approval of government bills.

“I was seeing signs of improvement in the political scene, but (Mr. Gomes’ episode) shows that the government’s relationship with allied parties is still rough,” said Ricardo Ribeiro,a political scientist at MCM Consultores, based in São Paulo.

It is unclear how congressional leaders will conduct the vote on the payroll-tax bill, but both Mr. Cunha and Mr. Calheiros may at least influence how fast it comes to a vote. By the Congress’s rules, each chamber has up to 45 days to vote on the matter.

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