The House bill on tobacco tax is dangerous – for Duterte and for the country

13 December 2016:

The House of Bebot Alvarez, Rudy Fariñas, Eric Singson, Dakila Cua, et al rubber-stamped a weak and controversial tobacco tax bill. Attempting to supplant the historic Sin Tax law passed in 2012 that corrected the structure and rates of the tobacco tax, the House leadership launched a swift attack, in the style of the Nazi’s blitzkrieg, to smother the opposition.

Take note: It took less than 10 days to have House Bill (HB) 4144 approved. Its passage went through two meetings at the Ways and Means committee and two plenary sessions. The chair of the Ways and Means committee, Dax Cua, dismissed outright an alternative bill and any amendments.

HB 4144 is not even a priority bill of the administration; in fact it violates the common position of the Department of Finance (DoF) and the Department of Health (DoH). Yet, the bill has moved rapidly, and it has passed second reading ahead of the administration’s pet bills like the equally notorious death penalty. Both the death penalty bill and the bill on low cigarette tax rates kill.

HB 4144 proposes two rates for cigarettes — P32 for the low-priced brands and P36 for the higher-priced brands. The rates are ridiculously low.

For example, HB 4144 introduces a cheap rate of P32 for the lower-priced brands, a paltry increase of P0.80 from the rate that the current law provides in 2018 (assuming the law is not touched). Although HB 4144 intends to become effective in 2017, this is impossible. January 2017 is around the corner, and HB 4144 still has to pass through several stages, namely the Senate, the bicameral conference committee, and the President’s signature.

Legislators composing the Northern Alliance, who mainly come from the Ilocos region and who are associated with the tobacco industry, deceivingly say that their bill is better than the current law because of the increase in tax rates. But the increase they want is negligible in terms of health impact and revenue gain.

To illustrate, an excise tax of at least P48 (far from the HB 4144’s rates of P32 and P36) is needed to meet the target of the National Tobacco Control Strategy to reduce smoking prevalence to 19.4% by 2022, from the current 23.3%. Moreover, Health Secretary Paulyn Ubial has a wishful aggressive target of bringing down smoking prevalence to 10% in 2022.

With regard to revenue impact, the HB 4144 rates are way below what the DoF recommends. Representative Joey Salceda, who is taking up the cudgels for the DoF in the lower House, has filed an alternative bill that imposes a unitary rate of P40 in 2018, followed by a series of moderate five-peso increases till the end of Rodrigo Duterte’s term.

Further, HB 4144 throws out a very important reform in the 2012 Sin Tax Law — having a unitary tax system. A unitary tax is superior to dual or multiple rates. It maximizes revenue collection. As an example, a unitary tax of P36, or more, obviously fetches more revenue than the HB 4144 rates of P32 for low-priced brands and P36 for high-priced brands. In addition, a unitary tax, in contrast to two or more rates, is simpler to administer. It makes the system less vulnerable to tax evasion.

From the viewpoint of health, a unitary tax is a way of enabling a price-sensitive smoker like the poor and the young to quit smoking. Having a lower tax for certain brands will only encourage such a smoker not to quit but to shift consumption from the higher-taxed cigarette to the lower-priced one.

The real reason why the House leadership and the Northern Allowance has railroaded the bill is to serve the vested interest of a tobacco company named Mighty. Mighty gains from a system of different rates based on prices of cigarettes. Mighty’s cigarettes belong to the low-priced category. Hence, lower taxes for its brands give them a price advantage. The adoption of two rates or the rejection of the unitary tax abets anti-competitive behavior.

How Mighty can maintain very low prices must be a subject of deeper investigation. Competitors have accused Mighty of tax evasion, and the Bureau of Internal Revenue in the past slapped fines against Mighty for tax discrepancy.

Worse, HB 4144 brings with it unintended adverse consequences for the Duterte administration. Duterte’s lapdogs in Congress are in effect biting Duterte.

It is a fact that HB 4144 is not a bill of the Executive. The DoF and DoH oppose it. It contradicts Duterte’s strong stand on tobacco control. While Duterte is focused on, nay, distracted with his war on drugs, the House leadership exploits this by rushing a bill that is not to the Executive’s liking.

We must likewise emphasize that a passage of such a weak bill can damage investor confidence, the credibility of government, and the quality of institutions in several ways.

First, it signals that the Duterte tax reform package will be severely compromised. The dilution of the tobacco tax reform manifests a grave problem that Congress will not cooperate in putting in place hard and solid tax reforms. In fact, Speaker Alvarez has repeatedly spoken against other important tax measures like the increase in the excise tax on petroleum products and the lifting of value-added tax (VAT) exemptions. In the same vein, the Chair of the Ways and Means committee, has not filed a bill on such tax-enhancing measures that the Executive considers urgent.

A heavily compromised tax reform package will surely upset sentiments of investors and creditors. It will endanger the fiscal position of government. Some disturbing signs of revenue slippage have appeared. These include increasing non-compliance on tax stamps on cigarette packs and the significant drop in excise tax collection for tobacco and overall decline on tax effort, with nominal growth rate outpacing the rate for tax collection.

Second, it shows that Congress will brazenly, arbitrarily, and suddenly change the rules of the game to serve vested interests, The unitary tax system is society’s preferred policy, and a consensus was forged through legislation in 2012. That piece of legislation has yet to mature and consolidate. But this early, vested interests have succeeded in the first stage towards scuttling the democratic consensus.

Third, it exposes a Presidency that does not have command of substantive legislated policy. This is the result of being obsessed with pursuing the interminable war on drugs and not using his political clout to advance the social-economic reform agenda.

But then again, my assumptions might be wrong. Perhaps, the President has accommodated his allies with vested interests.

After all, Bongbong Marcos is a recognized leader of the Northern Alliance — derisively known as the Northern Allowance — that spearheaded the blitzkrieg to annihilate the tobacco tax reform in the House of Representatives.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.