The granting of tax incentives has always been used by governments - at the municipal, state and federal levels - to boost industrialization. Its mechanisms range from the provision of credit and infrastructure to tax reductions, exemptions and deferrals. These incentives have been in practice since at least the 60s, but from the 90s onwards they became widespread, causing the fiscal war in the country to intensify, with widespread competition for new investments. The federal government lost the reins of negotiations, which have been assumed by the States to this day.

The exemption and deferral operations of the main state tax (ICMS – Tax on Circulation of Goods and Services) have been the instruments adopted in the fiscal war. This fact generated an apparently logical technical question: whether there would be negative consequences of this practice on the already weakened state budgets. And a common sense was formed about the terrible consequences for the local economy.

Despite the predominance of this opinion, in the dissertation "Fiscal war and federative finances in Brazil: the case of the automotive sector", presented to the Institute of Economics (IE) at Unicamp, researcher Maria Abadia Alves, supported by works such as that of her advisor, professor Sérgio Prado, demonstrated that fiscal war may not lead to the degradation of the fiscal situation of the States that practice it, although it invariably produces perverse effects for the country.

To further support her premise, the author established the purpose of the study as evaluating the impact of the fiscal war on public finances, without considering the gains brought by companies, such as jobs and the modernization of industrial parks.

Simplifying hypotheses - The researcher developed a case study in which the implementation of the automobile manufacturers General Motors, Mercedes-Benz and Renault, located in the south and southeast of Brazil, was analyzed through fiscal cost estimates for the installation of the automobile plant of the three.

All automakers received basic incentives such as land, aid for infrastructure and credit for purchasing equipment, categories linked to budgetary benefits. Thanks to the postponement of the collection of ICMS, a tax benefit, the State ended up providing working capital to automakers, which normally favors their business, while companies already established face heavy tax burdens and high interest rates.

To arrive at the estimates in the case of the three automotive companies, some simplifications were used. Inflation during the contract period and exchange rate variation (constant dollar) were not considered. Furthermore, the production of the cars was the same as foreseen in the contract.

According to the researcher, these projections simplify the calculations as much as possible because they are contracts that should expire between ten and 20 years. As it is difficult to predict what will happen to the economy until then, it was also decided to set both inflation and monetary correction at zero.

Dimension of incentives - The economist came to the conclusion that the subsidies offered will be around the initial investments made by companies.

In the case of the Mercedes-Benz factory, in Juiz de Fora (MG), the incentives given to it for 22 years total R$690,7 million and will result in investments of around R$695 million. The R$759,6 million in budgetary and tax subsidies granted to General Motors, in Gravataí (RS), for a grace period of 29 years, will be greater than the capital invested in its construction, which was R$600 million. The total subsidies from Renault, from São José dos Pinhais (PR), of R$353,7 million, for ten years, will be below the initial capital invested – R$1 billion.

The sum of the three cases resulted in a total volume of subsidies of R$1,8 billion, and the fact of considering zero inflation and absence of exchange rate variation may indicate that this value was underestimated and should be even higher.

The formula suggested by Maria Abadia is simple. “Not long ago, the methods consisted of just adding values. We then started to deduct the installments that the company would return, updating them”, she explains. “The press even overestimated the data, adding, for example, the credit obtained from the government and the value of the ICMS to be postponed, plus the value of the land and the infrastructure, failing to consider that the company would pay the loan and the ICMS deferred (under advantageous conditions), a posteriori.”

The calculation of the land subsidy was carried out based on the market value of the land and this amount was disbursed by the State. In the case of General Motors, the State purchased land worth R$12 million and sold it to the company for R$1 million. The subsidy was R$11 million. In other words, the State paid R$12 million, received only R$1 million for the purchase and bore the loss.

On the other hand, the infrastructure was calculated based on technicians' estimates. However, when the credits and ICMS exemption were verified, the business changed its shape: it would be important to consider the company's disbursement in the future.

The author of the dissertation chose to bring the values ​​of these loans and payments that the company would make to present value, on the date of signing of contracts between automakers and respective States.

Lots of money, few jobs

Budgetary benefits require immediate disbursement by the government. As for taxes, not necessarily, as the State gives up revenue that did not exist before the installation of the new investment. Thus, although some incentives imply the disbursement of resources by the State, this is small compared to the ICMS exemption. In other words, it is a good deal for the State, as it spends little compared to what it exempts from tax.

With the end of the subsidizing period, the company starts to pay ICMS normally, increasing the level of state revenue. This is how, when implementing companies, the State does not count on ICMS revenue. In the medium and long term, it will be met and may make it feasible for the government to grant subsidies.

For the country as a whole, the conclusions are not so favorable. Hypothetically, if these three investments in the automotive industry occurred in the country, regardless of tax incentives (which is quite plausible, as investment decisions are guided by extra-fiscal factors), the total volume of subsidies would constitute a waste of resources for the Federation.

The States analyzed gave up R$1,8 billion in order to ensure an investment that would come to Brazil anyway. State governments offered this large amount to three large oligopolistic companies, which can obtain easier credit on the international market, while many national companies, especially small ones, face great financing difficulties and generate a much greater number of jobs than the automobile industry.

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