Reforming Brazil’s State Participation Fund : Achieving Fiscal Equalization by Introducing Fiscal Transfers for Forest Conservation

Overview & Synopsis

The Fundo de Participação dos Estados (FPE), Brazil’s main intergovernmental fiscal transfer of sharing Federal tax revenues with the States, is in need of fundamental and urgent reform, following decades of at best marginal changes to inequitable and outdated distribution formulas, and various rulings by the Brazilian Supreme Court demanding adjustments. The reform of the FPE provides an opening for also promoting the introduction of an ecological fiscal transfer to incentivize (and recognize) states’ role in the provision of ecosystem services, especially in the Amazon. This report highlights that one of the most critical policy challenges the Government of Brazil (GOB) faces, advancing the ecological agenda across subnational governments, could be an integral part of another critical task currently facing the GOB, the much needed and long waited for reform of the FPE. This opportunity for the coupling of these two policy issues arises because, as we will show, an equitable reform of the FPE that ignores the provision of ecosystem services by states would imply overall a significant withdrawal of funds from Amazonian States.