A Note On Local Tax Revenues: the Case of Brazilian Municipalities

Abstract

Recent studies in Brazil find that the implementation of a major Tax Reform in 1967 led to the relative decline of state and local revenues due to excessive emphasis on tax coordination at the central level. We suggest that one problem of the municipal fiscal structure is its heavy dependence on indirect taxation. Also, the reduced productivity of local tax bases can be explained by their low tax effort, since they find it politically much less costly to obtain resources through transfers from other spheres of government than to exploit vigorously their own tax base. In order to effectively improve the financial situation of Brazilian municipalities it would be necessary to adjust the national tax code so as to allow a more suitable distribution of tax revenues between central and local governments. At the municipal level, this can be achieved through increased reliance on property taxation whose revenues finance public services that are appropriated, essentially, by local taxpayers. Greater reliance on the property tax would permit a higher degree of fiscal autonomy at the local level and, in this case, the municipalities would not be unduly exposed to fiscal disputes with higher levels of government.