Public finance corresponds to the procurement, distribution, use and control of financial resources (MATIAS-PEREIRA, 2012). In Brazil, they are mainly oriented by the Federal Constitution of 1988 (CF/88), by the Budget Law (Law no 4.320/64) and by the Complementary Law no 101/2000, hereon Fiscal Responsibility Law (LRF), which establishes the guidelines for performance of all federative agents, specially concerning the development and control of public budget.

In the municipal context, public revenue can be a result of the exploration of tax base, through the revenue of taxes of their own competence or from intergovernmental transferences (REZENDE, 2001). With the Federal Constitution of 1988, several tax competences were transferred to municipalities, as it is the case of the revenue of the Imposto Predial Territorial Urbano - IPTU (property tax), Imposto sobre serviços de qualquer natureza - ISS (tax over services of any nature), Imposto sobre a Transmissão de Bens Imóveis - ITBI (property tax), as well as charges and improvement contributions (BRASIL, 1988). As it depends on the economic and demographic characteristics of the municipalities, such as per capita income, level of urbanization, population size and sectorial composition of production (RODRIGUES, 2004; CAMPELO, 2003), tax revenue varies between Brazilian municipalities, causing inequalities in terms of capacity and fiscal needs.

Regarding intergovernmental transferences, the most important are transferences from the Union, such as the Imposto Territorial Rural - ITR (Rural Territorial Tax) quota, Imposto sobre Operações Financeiras - IOF-Ouro (Financial Operations Tax) quota, Contribuição de Intervenção no domínio Econômico - CIDE-fuels- (Intervention Contribution in the economic domain), Fundo de Participação dos Municípios - FPM (Municipality Participation Fund), in addition to those corresponding to resources linked to specific areas, such as transfers from the Fundo Nacional de Desenvolvimento e Manutenção da Educação Básica - FUNDEB (National Fund for the Development and Maintenance of Elementary and the Sistema Único de Saúde - SUS (Unified Health System), among others (MENDES; MIRANDA; COSSIO, 2008). Concerning transferences of origin from the states, the share of the Tax on Circulation of Goods and Services (ICMS) and the Tax on Property of Motor Vehicles (IPVA), are the most significant in the budgets of the municipalities, whose volume of resources transferred varies according to the Brazilian states.

In addition to complementing municipal revenue, transfers are important instruments for reducing regional inequalities (MENDES; MIRANDA; COSSIO, 2008; BAIÃO; CUNHA; SOUZA, 2017), especially the FPM, which, as a mandatory transfer, expands autonomy of the receiving government, which, then, is able invest the resources in areas that require greater investments.

Current FPM distribution criteria use the population and income factor per capita for the capitals of each state, and population ranges for inner state municipalities Such criteria do not require efforts by the municipalities to receive the resources from the respective fund, causing tax revenue inefficiency revenue (ORAIR; ALENCAR, 2010) and, therefore, high levels of financial dependence (SOUSA; ARANTES, 2012; MASSARDI; ABRANTES, 2015; 2016; PASSOS; NASCIMENTO, 2018).

Massardi and Abrantes (2015) identified that the small municipalities of Minas Gerais were highly dependent on the FPM, and for some municipalities the dependence on this transfer represented on average 75.2% of the total current revenue for the analyzed period. These results were corroborated by Passos and Nascimento (2018), who found a strong dependence on the FPM for municipalities in the state of Piauí. Thus, the FPM is fundamental for municipal public finances, especially for small municipalities, which, due to low exploitation of their tax base, depend on this resource to finance public services.

Concerning the reduction of regional inequalities and the promotion of socioeconomic development, research has sought to understand the role of public finance management in achieving this purpose. Massardi and Abrantes (2015) studied the municipalities of Minas Gerais and observed that a large part of the municipalities presented a low level of fiscal effort (revenue) and a high level of dependence on the FPM. Additionally, when correlating the level of dependence of the FPM with the fiscal effort index and with the socioeconomic development, measured by the IFDM, they verified a negative correlation; on the other hand, the fiscal effort index showed a positive correlation with the IFDM. This result was corroborated by Vieira et al (2017), who found that the municipalities with the greatest collection effort showed higher levels of socioeconomic development.

The IPI originated from the former Consumption Tax of 1934, was instituted by Constitutional Amendment nº 18, of December 1, 1965 and its competence belongs to the Union and it is expressed in the current Federal Constitution (CF / 1988) and in the National Tax Code (Law 5.172 / 66). According to the constitutional text, the IPI “is a non-cumulative tax that affects consumption, being selective according to the essentiality of the good and whose value is passed on to the final consumer” (BRASIL, 1988). These characteristics allow different rates according to the product, that is, a higher or lower rate that may vary over time, and that converge to the interests of the fiscal policies that governments want to implement (ABRANTES et al, 2017).

Although it has fiscal characteristics, that is, a fund-raising function for public coffers, the IPI is essentially extra-fiscal, as it aims to interfere in the economic sphere, remaining as a means to achieve the ends of the current fiscal policy (ABRANTES et al, 2017; OLIVEIRA; PINTO; SANTA RITA, 2017). “Extrafiscality does not necessarily mean that the State will stop collecting resources with taxes coming from this tax function” (ABRANTES et al, 2017, p. 55). The difference is characterized by the purpose of the tax, which, in this case, is not exclusively collected, even though it provides the inflow of funds to public finances (ABRANTES et al, 2017). Thus, the IPI is used as an instrument of state intervention in the economic and social spheres.

Serrano et al (2018) recommend that the flexibility in the application of IPI legitimizes its use for regulatory purposes, whose objective is to intervene in the economy. This intervention can be “encouraging or discouraging of certain operations or activities, by means of greater or lesser taxation on them” (ALEXANDRINO; PAULO, 2002, p. 63).

Due to the characteristics of an extra fiscality, the IPI reduction was used as a regulatory measure for the 2008 crisis, which has drastically reverberated in Brazil. Some measures of exemption of this tax were taken, such as the ones in Ordinances 6.687/2008, 6.743/2009, 6.825/2009, 6.890/2009, 7.394/2010, 7.57/2011, 7.660/2011[4] and 7.725/2012 that initially benefited the automobile sector and after the construction supplies, basic appliances and furniture sectors (MARTINS, 2014; ABRANTES et al., 2017). It is estimated that up to date the repercussions of such measures reflect on the public internal revenue, once the Union did not raise BRL 6.1 billions related to IPI exemption on the automotive sector (MARTINS, 2014).

It is evident that the exemptions adopted by the Brazilian federal government have directly impacted the economy of the country. Abrantes et al. (2017) have shown that the reduction in the payment of IPI in the tax exemption periods has negatively influenced the turnover of companies in the automotive sector. Therefore, results suggesting that “individual tax changes arising from fiscal policies, in this case, the exemption from IPI, was not effective overall for the increase in gross sales revenue of companies in the Vehicles and Parts and correlates” (ABRANTES et al., 2017, p. 66). On the other hand, Serrano et al. (2018) have found a positive relationship between the reduction in the IPI and the increase in gross revenue in the construction sector.

In addition to the impacts on the productive sectors, the data showed that the tax waiver granted from 2008 onwards related to the IPI had a direct impact on the distribution of tax revenue, particularly on transfers from the Participation Funds of States (FPE) and Municipalities (FPM), which are constituted by the resources from the collection of IPI and IR.

A survey made by the National Confederation of Municipalities (CNM), based on the methodology of the Federal Court of Accounts (TCU - Brazil), has estimated that the tax waivers of IPI and IR are more than BRL 516 billions from 2008 to 2014, having a negative impact on the FPM transfer of BRL 122,7 billions, being the southeast the region with the most negative impact coming from the transfers result to IR and IPI exemptions (CNM, 2016).

Mucci et al (2016) have found that despite the improvements of an economic nature, the exemption from the IPI has impacted the formation of the FPE, compromising its main function, which is to promote socioeconomic balance and alleviate regional inequalities through the development of the poorest states of Brazil (MUCCI et al., 2016). Oliveira, Pinto and Santa Rita (2017) identified that the IPI exemptions granted by the central government to some productive sectors did not compromise the public finances of municipalities of the state of Alagoas, nor did they indicate a significant imbalance to compromise the financial autonomy of the municipalities or the continuity of current public policies. This is due to the fact that the reduction in FPM resources, caused by exemptions from the IPI, was stabilized by the increase observed in the collections of ISS and IPTU (OLIVEIRA; PINTO; SANTA RITA, 2017). Thus, the magnitude of the impact of the exemption from the IPI tax on municipal public finances is also conditioned by the revenue capacity of Brazilian municipalities.

In order to identify whether the public finances of the municipalities of Minas Gerais have undergone significant changes with the exemption from IPI, one must analyze the execution of municipal revenue over the analyzed period, as well as to know the behavior of the IPI revenue, identifying its variation. Considering this, graph 1 below shows the revenue of the federal tax for the period 2006-2016, considering the nominal and deflated values.

Graph 1
IPI revenue behavior over the years
Research Results

Graph 1 features the two moments when the revenue of IPI decreased. The first, between 2008 and 2009, due to the federal government measures to reduce the respective tax rates, according to Temporary Statue nº 451 of November 14, 2008 and Decree nº 6.687 of December 11, 2008, attempting to face the consequences of the 2007/2008 economic crisis that started in the United States. The second, between 2011 and 2013, which resulted in the reduction of the rate for some sectors of the economy, automobile, import of inputs related to national security, among others, through decrees such as: Decree 7.437, MP 540 (Law 12.546), Decree 7.541, Decree 7,542, Decree 7,543, MP 544 (Law 12,598). Table 2 shows, by tax, the most relevant real variations and the factors that contributed to the result of the total IPI.

Table 2
Revenue of IPI by type of product in millions

Source: Research Results, based on the National Treasury Secretariat.

Note: Deflated values (IPCA / 2016).

Table 2 shows that the sector suffering the greatest exemption from the IPI is the automobile sector, with emphasis on the year 2009, which registered a drop of 67.2%. Despite this reduction in the IPI on automobiles, Wilbert (2014), realized that even the exemption from IPI being capable of causing a behavioral change in the market, it did not cause any change in the sales trend, which may reflect in the increase in the collection of other taxes . However, in this same research, Wilbert (2014) states that if the IPI reduction had not happened, the result would have been a drop in car sales. Thus, the importance of the IPI is clear as a market stabilizer, reinforcing its feature as a regulatory instrument of an interventionist state.

The study of the National Confederation of Municipalities (2009), identified that the crisis of 2007/2008 and the measures of the federal government to face it, caused, in 2008, a relief of 69.60% of the IPI split in the sectors of automobiles, tobacco and others, which, added to a reduction of 11.39% in the Income Tax, were responsible for the fall of the FPM in 8.5% between the first quarter of 2008 until 2009. The CNM (2009) also shows that 6.5% of these 8.5% are attributed to the crisis and 1.9% to the expansion of FUNDEB's retention percentage. These figures caused a reduction in state transferences to the State of Minas Gerais by 12.5%, in February 2009.

It is noticeable that the exemptions from the IPI caused considerable reductions in the general revenue of the Union, mainly in 2009, when the tax reduction reached the level of approximately 25%, when compared to the previous year. Since this tax is an important source of funds for the Municipal Participation Fund, the behavior of municipal finances in this period must be analyzed.

Table 3
Descriptive statistics average for the period 2006 to 2016

Source: Research Results.

Notes: ¹ Variation Coefficients

The results of the descriptive statistics show a disparity chart between municipalities of Minas Gerais, as shown by the variation coefficient, even inside strata formed by same size municipalities, which corroborates do the findings of Galvarro et al (2009) and Costa et al (2012), which found an inter-regional disparity chart in the national context. The variation is greater between the variables that represent municipal public finances, especially in terms of their own revenue, confirming the existence of distinguished fiscal efforts (MASSARDI; ABRANTES, 2015).

The bigger municipalities, with over 100 thousand inhabitants, presented the higher averages for the financial variables and also for municipal human development indexes, suggesting that better levels of exploration of economic activity and public finances yield better socioeconomic conditions.

On the other hand, it is noticeable that small municipalities (small I), have low revenue potential, receiving the biggest portion transferred as FPM (BRL 69.799.273,93). Besides, due to the low revenue flow, the FPM represents, on average, 57.7% of the current revenue in such municipalities, making them highly dependent on this financial resource. Also, the municipalities with no more than 20.000 inhabitants, small II and III, are FPM dependent to a level of 46.7% and 40.6%, respectively, corroborating to Massardi and Abrantes (2015) on the importance of FPM for municipalities with small populations and low economical potential.

Aiming at verifying if the municipal finances showed significant changes after the exemption from IPI, the Wilcoxon test was carried out, with results laid in Table 3.

Table 3
Wilcoxon Test Results

Source: Research Results

Notes: ., based on the negative ranks; .. based on the positive ranks

On panel A, that congregates the results of the Wilcoxon test for the period from 2006 and 2011, we noted that the p-value was smaller than 5% for all variables, suggesting that there is significant evidence of statistical differences on the behaviour of municipal finances before and after the Ordinance n. 6.687, published on December 11th, 2008, which indicated the set of measures for the exemption from IPI implemented by the federal government.

Consistent with the results obtained for Panel A, the results for the second period of analysis (Panel B) point to significant differences in the behavior of revenue flow (IPTU, ITBI, ISS and fees), for FPM and human development indexes, since the value p in the statistics of the Wilcoxon test was lower than the significance level ( 5%), which meant rejecting the null hypothesis, excepting the special assessment tax, whose p-value was 0,346. We verified, therefore, that the alterations promoted by Decrees n. 7.567 and n. 7.660 of 2011, on IPI revenue flow also reflected on how public municipalities' finances behaved.

In general terms, both results obtained on panels A and B show that public finances and socio economic indexes of municipalities of Minas Gerais changed significantly after exemptions in 2008 and 2011. The existence of variations on public expenditure after IPI exemptions was also noticed by Oliveira, Pinto and Santa Rita, (2017), that reported alterations in the transfer of FPM to municipalities of Alagoas in 2009. However, the changes on the finances of municipalities in Minas Gerais were positive, suggesting that during that time there was an accession on the amount that corresponded to the municipalities' public revenue. This increase is mainly a result of the extension of the municipal tax base, which implicates greater levels of own revenue, which compensates the IPI reduction in the composition of the FPM passed on to the municipalities.

Furthermore, although the impact of the IPI tax exemptions on Union revenue, and, consequently, on municipal revenue, through the FPM, it is worth mentioning that the effects were not very significant, considering the results of this study. This since the policy of the federal government to provide financial support to municipalities, according to Temporary Statute No. 462 of May 2009, converted into Law No. 12,058 / 2009, with its publication meant that the amounts transferred under FPM were not so different from previous periods to the exemptions, in an attempt to minimize the negative effects of fiscal policy actions from the central government (ASSUNÇÃO; ORTIZ; PEREIRA, 2012).

Considering that the averages of the indicators are different, it is possible to identify, in Table 4, how many municipalities had an increase and how many had a reduction in the behavior of public finances and in the socioeconomic indicators after the implementation of the sets of exemptions described in panels A and B.

Table 4
Ranks established by the Wilcoxon test for the paired samples

Source: Research Results

As a result of the ranks, it is noted that for all the analyzed variables, the municipalities of Minas Gerais showed a positive variation, as evidenced by the greater amount of positive ranks. Panel A shows that less than 3% of the sample studied (13 municipalities) presented a reduction in the transfer of the FPM, 12 of these being small municipalities. Also, in that same period, there was an increase in revenue of more than 50% of the cases, with emphasis on the ISS, increasing in 471 municipalities.

Panel B shows that the number of municipalities with FPM reduction (negative ranks) was higher than the previous period analyzed (Panel A), reaching 39 municipalities, that is, the exemptions from the IPI implemented by Decrees No. 7,567 and No. 7,660 of 2011 negatively impacted a larger number of municipalities. On the other hand, there was a significant improvement in the socioeconomic development indicators, given that 564 and 483 municipalities registered an increase in IFDM Education and IFDM Health, respectively.

michellevieiracco@gmail.com