Territorial Inequalities and Fiscal Federalism in Brazil: An Incomplete Path Toward Equalization

Territorial socioeconomic inequalities are the main diversities to be accommodated in the Brazilian federation. They have been a major influence in the design of a transfer system that reduces intergovernmental inequalities in per capita revenue, especially in the case of municipalities in which the Gini coefficient from own revenue has been reduced by half (from 0.5 to 0.24). Grants are mandatory and regulated by the Constitution and laws that establish stable formula-based distribution criteria. Therefore, they assure a significant and steady amount of resources to subnational governments and are protected from short-term political bargaining. However, some important transfers do not have redistributive objectives and increase inequalities. Also, the equalization funds’ distribution criteria present inefficiencies that favor small states and municipalities regardless of their socioeconomic development level. We argue that this historical and political process produced a system that accommodates diverse fiscal capacities by significantly reducing inequalities arising from own revenues. However, its efficiency can be questioned. Moreover, since democratization, the few and marginal advances in this redistributive federative agenda highlight how difficult it is to articulate territorial interests in broad coalitions able to approve redistributive fiscal reforms.