The Brazilian economy is facing a slowdown in 2025, which threatens the state's revenue from ICMS (Tax on Circulation of Goods and Services), according to a technical note by Febrafite (National Association of State Tax Auditors). This downturn comes at a critical juncture just before the anticipated implementation of tax reform, exacerbating fiscal challenges for various states. Given that ICMS is a crucial source of income, especially from essential goods and fuels, these projected revenues are under significant stress.

The current issues stem from structural problems that began in 2022, primarily due to two complementary laws enacted during Jair Bolsonaro's administration that led to decreased collections from ICMS. These laws have particularly affected sectors generating essential goods, causing a ripple effect across state finances. As states brace for a significant tax overhaul, the loss of revenue from such vital streams raises concerns about their ability to fund essential services amid these changes.

Febrafite emphasizes the importance of ensuring a smooth transition to the forthcoming consumption tax reform, known as the IBS (Single Goods and Services Tax). The organization calls for mechanisms that can provide stability and predictability, which are vital for maintaining federal balance and ensuring that state services remain financially viable. Without such measures in place, the states could face even deeper fiscal challenges in the near future, undermining public services and economic recovery efforts.