Brazil President Luiz Inacio Lula da Silva’s administration is racing to balance public accounts ahead of next year’s elections, with the economic team now focused on offsetting the IOF tax.

One option under debate is raising the proposed income tax on Agribusiness Credit Letters, known as LCAs, and Real Estate Credit Letters, known as LCIs, to 7.5% starting in 2026, according to a draft of the bill presented Wednesday by the bill’s rapporteur.

The move targets securities that are now fully exempt, making them the most contentious part of the plan, and drawing criticism from both agribusiness groups and financial markets on concern it will harm key industries. When introduced by the government, the proposed income tax rate for personal gains from investments in these securities was 5%. The draft bill, introduced Wednesday by Congressman Carlos Zarattini, aims to close the tax gap between these exempt securities and other financial assets.

According to Finance Minister Fernando Haddad, discussions on the matter are ongoing between the economic team and Congress. “Private credit securities known as LCI and LCA will continue to be encouraged, but the tax rate differential compared to other public securities is too large,” said Haddad on Wednesday. The minister reinforced that the provisional measure presented is essential to guarantee a budget without cuts in social programs.

Pushback

Still, opposition is already being organized in the corridors of Lower House.

The agribusiness caucus, the largest in Congress, is firmly opposed to it. Lawmaker Pedro Lupion, president of the Parliamentary Agricultural Front, stressed that taxing LCAs will make it less attractive, affecting directly agricultural financing in Brazil.

“There is no compensation that can be negotiated that will avoid the damage that 7.5% will cause,” he said to journalists in Brasilia.

If approved, the tax change would take effect Jan. 1, 2026, marking a shift in how income from certain investments is treated. Meanwhile, income from real estate funds and Fiagro agribusiness investment funds would remain exempt.

Since the IOF proposal was unveiled, pushback has been intense. The fight over the financial-transaction levy has escalated from Congress to the Executive branch and ultimately required that the Supreme Court get involved.

For chief economist at Banco Inter Rafaela Vitoria, raising taxes in those securities is a bad move.

“It will discourage investment. Increasing capital taxes when we need to stimulate investment in Brazil is not the best approach,” Vitoria said.