28 November 2016:
Seeking to attain health and revenue objectives, the government and reformers in civil society, the health community, and the private sector pushed for and succeeded in legislating the Sin Tax Law in 2012.
The law has put in place substantial reforms: Steeply increasing the excise taxes on alcohol and tobacco, annually adjusting the tax rates to inflation by 2018, and adopting a unitary tax for cigarettes, regardless of price, and brand. It has resulted in unprecedented huge revenues, increased budget for health, and reduced smoking prevalence.
The unitary or single tax applies in 2017, at a rate of P30 per pack. The unification of rates in 2017 is expected to further enhance both the health and revenue goals. A unitary tax maximizes the amount of revenue to be collected with the disappearance of a lower tax rate for low-priced brands, simplifies tax administration, and helps current price-sensitive smokers quit as they are prevented from shifting to the higher-taxed, higher-priced brand to the lower-taxed, lower-priced brand in a two-tiered system.
But as the tobacco excise tax moves towards a unitary tax in 2017 at a rate of P30 and as the government intends to introduce new higher tax rates for tobacco and alcohol, tobacco companies are moving fast to weaken the law. One move has suddenly appeared in the form of House Bill (HB) 4144, authored by Representative Eugene Michael B. de Vera of the ABS Party.
The bill aims to prevent the tobacco tax from becoming a unified tax rate on tobacco products, in the guise of protecting the welfare of tobacco farmers.
HB 4144 runs contrary to the spirit of the Sin Tax Law. A unitary tax system is designed to optimize revenue collection and to ease tax administration.
For the purpose of illustration, let’s use HB 4144 as an example. It proposes two tiers or two tax rates. The lower tax is P32 per pack for cigarettes that have a net retail price (defined as the price that excludes the excise tax and the value-added tax) of P11.50. The higher tax HB 4144 proposes is at P36 per pack for cigarettes that have a net retail price of above P11.50. It is plain common sense to conclude that government will be earning more revenue from a single rate of P36 regardless of the price of cigarettes.
It must be stressed nevertheless that the rate increase that HB 4144 is proposing is ridiculously low, taking into consideration the question of affordability, specifically the increase in income and inflation. Hence, the rate of P32 to replace the rate of P30 must be rejected.
In terms of simplicity, the unitary tax, to quote the World Bank (2016), addresses “administrative difficulties of classifying cigarettes by declared value and focus more on observed volumes.” Having different rates makes the system more vulnerable to tax evasion and corruption.
Moreover, from a health perspective, a unitary tax helps deter smoking by preventing smokers who can no longer afford the higher-taxed, higher-priced brand to “downshift” to a lower-taxed, lower-priced brand. The data from the Bureau of Internal Revenue (BIR) and the Social Weather Stations (SWS) provide the evidence that smokers have shifted to the lower-priced, lower-taxed brands. In 2012, low-priced brands, according to the BIR constituted, 62.7% of total volume of removals. The Sin Tax Law was passed in end-2012, and in 2015, the share of lower-taxed brands to total volume of removals went up to 72.7%. Similarly, the SWS survey in 2014 showed that 12.8% of smokers shifted to cheaper brands.
What makes HB 4144 all the more repulsive is that it is being pushed ostensibly but deceptively to protect tobacco farmers.
A recent study done by Action for Economic Reforms (AER) and the American Cancer Society (ACS) titled “The Economics of Tobacco Farming in the Philippines (authored by Chaves, JJ et al., 2016) confirms other studies that the income of tobacco contract farmers has remained steady. In fact, the AER and ACS study says that average income for hectare slightly increased in comparison to the period before the implementation of the Sin Tax Law.
The tobacco industry and pro-tobacco legislators will claim that tobacco production went down in the past year, and they will attribute this to the Sin Tax Law. This is wrong. The data from the National Tobacco Administration clearly show that tobacco exports declined by approximately 15 million kilograms from 2013 to 2015, principally explaining the decline in local production by 17 million kilograms. The fact is, from 2012 to 2015, an average of 70% of local tobacco production was for the export of unmanufactured tobacco. In short, the narrowing gap of the tax rate leading to a unitary tax in 2017 is not a factor in the drop in local production.
Furthermore, the Sin Tax Law, by way of generating substantial revenue (and revenue is further optimized through a unitary tax), benefits the farmers. The law provides an earmarking for tobacco-growing areas and for the alternative livelihood of tobacco farmers. An amount equivalent to 15% of the total incremental revenue from the sin tax is earmarked for the improvement of the welfare of tobacco farmers. In 2015, the total incremental revenue amounted to P48.02 billion. That means for the same year, about P7.2 billion can be used to improve the productivity of farmers, provide safety nets for them in case of their displacement, and help them shift to producing other profitable crops.
To conclude, the Sin Tax Law is principally to attain health objectives by reducing smoking prevalence and using the incremental revenue to finance universal health care. In addition, tobacco farmers get an earmarking from the incremental revenue.
HB 4144 will undermine the welfare of tobacco farmers, damage health, and weaken revenue enhancement. HB 4144, for seeking a return to a non-unitary tax system and for proposing a low tax rate, must be opposed and dismissed.
Filomeno S. Sta. Ana III is the coordinator and Madeiline Joy Aloria is a researcher of Action for Economic Reforms