Tax Hike Fizzles in Brazil as Lobby Roars and Election Nears

(Bloomberg) -- Brazil’s government may be keen to rein in public spending, but its business leaders are somewhat less so.

After a month of delays, lawmakers this week once again postponed voting on a bill to eliminate payroll tax breaks and bring in much-needed cash for the government. Not only are legislators increasingly focused on October general elections. Behind the scenes Brazil’s manufacturing, agriculture and clothing industries are putting the screws on them to avoid raising taxes as many are still suffering from the worst recession on record.

While President Michel Temer’s administration is scrabbling around for cash to plug the country’s yawning fiscal deficit, industry lobbyists warn that a rollback of the tax break would result in cost rises, lay-offs and falling investment. Congressional deputies justify dragging their feet on the measure by arguing that there is little appetite for legislation that effectively amounts to a tax hike.

"If you are taking more money out of your pocket to give it to the government, then yes it is a tax increase", said Nilson Leitao, leader of the pro-business PSDB party, in an interview.

The stalling of the tax bill is indicative of a broader erosion of Temer’s legislative agenda ahead of the October legislative, gubernatorial and presidential race.

Marcos Montes, a deputy from the center-right PSD party, said Congress is not in the mood to vote for anything that could impact the result of October’s elections.

Both Leitao and Montes said they’ve been lobbied extensively on the issue. Vivien Mello Suruagy, head of Feninfra, a telecom infrastructure group, said she has been arguing against the bill in the lower house, the Senate and the executive.

"If the government increases taxes, we’re going to have a huge decrease in investment because prices are already depressed," she said. "There are going to be massive lay offs".

The tax break was introduced in 2011 to help struggling industries. Selected sectors were offered an opportunity to substitute a 20 percent payroll tax with a single-digit tax on gross revenues.

In Brazil a tax bill only goes into effect 3 months after its approval in Congress, meaning the government effectively already lost half of the legislation’s potential annual revenue.

To contact the reporters on this story: Samy Adghirni in Brasilia Newsroom at sadghirni@bloomberg.net, Simone Iglesias in Brasília at spiglesias@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Bruce Douglas, Raymond Colitt

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