Compared with previous arrangements, the 1988 constitution shared substantially more taxes with subnational levels, doubling the size of the participation funds (relative to their 1967 shares). The constitution also expanded the base of the state VAT at the expense of the federal government, by abolishing federal taxes on fuel, electric power, mining, and transport and incorporating their bases into the VAT. At the same time, the constitution also forced the states to sacrifice revenue in the interest of the municipalities, by increasing the _municipios'_ share of the VAT from 20 to 25 percent. Between the last year before the constitution (1987) and the year in which the majority of tax sharing was fully implemented (1992), the federal share of tax revenues, net of transfers, dropped from 61 to 52 percent. The state share increased, due to the growth of federal transfers and the broadening of the VAT base. This increase was partly offset, however, by the states' obligation to increase their own transfers to the municipalities. The effect was most striking at the municipal level. The municipal share of net after-transfer revenues increased roughly 40 percent over the six-year period, from 12 percent in 1987 to 17 percent in 1992. See table 2.

The participation funds substantially redistribute funds among regions. On average, states of the north, northeast, and centerwest receive twice the level of participation funds as states of the south and southeast. Because the majority of federal taxes are generated in the south and southeast, the extent of regional redistribution is even greater than this population-based calculation would suggest.

Table 2. Federal and Subnational Shares of Tax Revenues in **Brazil,** Before and After Transfers, 1987-92

||**_Sr_**<br>_Sha_|_re before tr_|(percent)<br>**_ersa_**<br>_ansfers_|_Shar_|**_er_**<br>_e afer tra_|**_r_**<br>_nsfers_|
|---|---|---|---|---|---|---|
|_Year_|<br>_Federal_|<br>_State_|<br>_Municipal_|<br>_Federal_|<br>_State_|<br>_Municipal_|
|1987|70|27|3|61|28|12|
|1988|70|27|3|61|27|11|
|1989|_65_|32|3|57|30|13|
|<br>1990|<br>65|<br>32|<br>4|<br>54|<br>30|16|
|<br>1991|<br>62|<br>32|<br>!<br>6|<br>_51_|<br>30|18|
|<br>1992|<br>62|<br>32|<br> <br>6|<br>52|<br>31|17|

> _Source:_ Afonso 1994. Taxes include federal social security contributions

Transfers are mostly fixed by formula (not counting debt bailouts), so condition 2 is filled. Condition 1-revenue self-sufficiency-is met for the large states, but not the small ones.

Following a pattern established in earlier constitutions, the 1988 constitution explicitly defines the powers of the federal government, while granting states "all powers not otherwise prohibited by this constitution." Among the responsibilities assigned to the federal government are national defense and social security. The federal government has exclusive control over the emission of currency, control of public debt, regulation of interstate and foreign trade, and establishment of the "general norms of public employment." The constitution also delineates concurrent responsibilities of the federal government and the states, including tax legislation, education, and social assistance, and specifies that federal law will be limited to "general norms" but will prevail in the event of conflict with state legislation.

Although the 1988 constitution was largely decentralizing in spirit, it extended central control in areas such as personnel. The federal constitution defines the rights of public sector employees at all three levels of govemment. Under the constitution, governments can neither dismiss redundant civil servants nor reduce salaries in nominal terms. Public employees have the right to retire after only 35 years of employment (fewer for women and teachers), with a pension equal to their exit salary plus any subsequent increases granted to their previous position (some revisions were made in late 1998). These constitutional guarantees severely restrict the states' ability to adjust.

State governors are directly elected for four-year terms (and as of 1998 can succeed themselves once). States have unicameral legislatures, whose members are elected at large by proportional representation. Members serve four-year terms with no limit on successive terms. This structure is repeated 9