Rollback of payroll-tax cuts will test ruling coalition

With the ruling coalition mired in infighting for space, the provisional measure (MP) that rolls back the payroll-tax cut will be the government’s first big test after the Chamber of Deputies shelved a charge against President Michel Temer for crime of passive corruption. The bill is one of the most important for the economic team to settle this year’s and 2018’s accounts but its effects may expire on August 10.

Fearing the MP will expire, Mr. Temer appealed on August 6 at the Presidential Palace to the presidents of the Chamber, Rodrigo Maia (Democrats, DEM, Rio de Janeiro) and of the Senate, Eunício Oliveira (PMDB of Ceará), to accelerate voting on the bill. Worried about government revenues, Finance Minister Henrique Meirelles also attended the meeting.

Mr. Oliveira told he had promised Mr. Temer to schedule a Senate vote on August 09 if the Chamber sets its vote for the 8th of  August. But Mr. Oliveira stressed that he will not admit having senators “rubber stamp” provisional measures from now on. In order to get a vote, the decrees should arrive at the Senate one month in advance. Nevertheless, because of the relevance of economic issues, he has agreed to schedule the vote despite the tight deadline.

The base of 263 to 280 votes (if those absent on the floor are considered) that emerged from the vote on the charge will be tested in an extremely unpopular agenda (a tax hike) that displeases business leaders and former campaign donors and has potential of causing layoffs, as the affected sectors claim.

The government was already facing resistance even before the accusations that emerged from the plea bargain of JBS owners weakened Mr. Temer, and will have more problems this week, with the need of deputies passing the proposal on August 08 to avoid the risk of it losing the validity. The MP needs to be passed by the Chamber and Senate floors by August 10 in order not to expire.

The government’s original proposal, of preserving payroll-tax cuts only for three industries (passenger transportation, civil construction and communication), would add R$4.75 billion to the fiscal revenues, because of being in effect only from July, and R$12.5 billion next year, when it would be valid for the entire year.

But the committee of senators and deputies analyzing the MP has already approved significant alterations, which the government will try to reverse on the floor, such as the postponement — from July 2017 to January 2018 —, of the end of the payroll-tax cuts, which allow companies to pay social-security contributions based on a percentage of their gross sales, instead of collecting 20% over their payrolls.

The lawmakers also increased the activities that may continue opting for the tax cut from the six proposed by the MP to 16. The draft preserved the sectors initially contemplated in the first round of the program, launched by ex-President Dilma Rousseff in 2011: information and communication technology, call center, leather, footwear, apparel.

Moreover, others were included after the threat of rising costs, such as cargo transportation, bus manufacturing, infrastructure construction, newspaper and radio companies, “strategic defense companies” (Avibras, Embraer and Iveco), industrial and agricultural machinery and equipment.

To justify the change, Senator Airton Sandoval (PMDB of São Paulo), rapporteur of the MP, argued that the exclusion of the sectors from those benefited by payroll-tax cuts would cause the dismissal of 258,000 people and increase spending on unemployment insurance. “The awareness that the MP 774 will cause unemployment in other sectors, as loudly expressed by several deputies, senators, forces us to a Sophie’s choice, expression that denotes the imposition of choosing between all bad options,” he said.

The committee’s lawmakers, of the ruling coalition and the opposition, rejected the government appeals to maintain the original proposal, and there is not much sympathy either for the government text on the Chamber floor. The Chamber speaker has already warned Finance Minister Henrique Meirelles of the difficulties and was not even scheduling the matter for vote.

The MP was put in the backburner with the attentions turned to the charge against Mr. Temer and will lose validity if it is not passed until August 10 by the Chamber and the Senate. Since the MP was issued this year, another version could only be issued in 2018, reducing the revenue of the two years. The government could have as alternative also passing a bill in fast-track regime, but this strategy didn’t work in previous years and would also require to fulfill a 90-day period for the tax to begin being collected.

The deadline gets even tighter because there are two other provisional measures also close to losing the validity — to increase the fine for health infractions of products of animal origin and to permit that municipal governments include in their education budgets funds from the regularization of unreported assets held abroad that will arrived late last year — and that will have to be voted before.

Moreover, the opposition says it will continue obstructing the agenda. “Each matter they put to vote, we will impose difficulties for them to understand that the base is not solid and to understand they don’t have force to vote the pension [reform] neither now, nor at the end of the year,” said the Workers’ Party (PT) leader, Deputy Carlos Zarattini, of São Paulo.

In addition to the opposition, the government has problems in its own allied base, with the PMDB and the formerly known Centrão block (smaller parties) demanding the resignation of Brazilian Social Democracy (PSDB) ministers to take their places.


Source: Valor Econômico