Don’t kill the goose

Taxes are the lifeblood of the government.

And in the case of the Philippine government, it seems to have relied on excise taxes as a way of financing public expenditure, including infrastructure, health, education, among others.

In his sponsorship speech of the bill that later became the Sin Tax Law, Sen. Ralph Recto in 2012 discussed the huge contribution of tobacco taxes in the government’s revenue collection effort, noting that excise taxes from tobacco amounted to P25.8 billion. In addition, the industry contributed P5.6 billion in value-added taxes and another P5 billion in income and other taxes.

But instead of helping raise tax collections, the law has reduced excise tax collections from cigarettes.

Excise tax collections from one cigarette company declined 6.3 percent, from P50.67 billion as of Sept. 2015 to P47.5 billion as of the same period this year. In the case of three other companies, it dropped 15 percent, 21 percent, and 26.5 percent, year-on-year.

By Oct. 2016, collections continued to go down. For one company, the largest in the country, it dropped 10 percent compared to the same period in 2015. In the case of three other cigarette firms, it was reduced by 14.6 percent, 33.4 percent, and 31.8 percent.

One company pointed out that the Sin Tax Law has become counter-productive and has resulted in a decrease in excise tax collections. The decrease, it said, is due to price elasticity or the buyers’ incapacity to pay as cigarette prices go up.

All four companies have reported a significant reduction in the amount of cigarettes being pulled out or removed from their places of production. In the case of two companies, the reduction has reached more than 40 percent.

Studies have shown that the poor and the youth are particularly sensitive to price increases and that the decrease in the consumption especially by the poor translates to a consequent decrease in government revenues from excise taxes on cigarettes.

On the other hand, price increases on cigarettes have little to no effect on the higher income bracket of society since they are less responsive to price increases compared to the lower income users, the same studies revealed. So irrespective of the increase in taxes on higher priced cigarettes, the same quantity will be consumed by those who can afford to pay, it added.

Thus, if the government hopes to keep the goose that lays the golden egg so to speak alive so that it will continue to generate funds that could be spent for the needs of its constituents, while at the same time addressing health concerns being raised against smoking, then it has to strike a balance between these too concerns.

There is currently a debate as to whether a two-tier tax system on cigarettes or a unitary tax system will address these concerns.

Under the current Sin Tax Reform Law or Republic Act no. 10351, a unitary excise tax rate of P30 per pack will be imposed on all cigarette brands starting Jan. 1 next year compared to the two-tier system being implemented this year wherein cigarettes priced at P11.50 per pack are being taxed at P25 while those priced higher are being levied P29 per pack.

Oppositors to a unitary tax rate say that a single rate unduly penalizes the poor since lower priced cigarettes will bear the burden of the increase while those who can afford are being rewarded since the single tax rate is a smaller percentage of the price of the cigarettes that they consume.

Under House Bill no. 4144 authored by party-list Rep. Eugene Michael de Vera, the two-tier system will be retained but low priced cigarettes will be charged P32 per pack and higher priced ones, P36 per pack, aside from an annual five percent increase in excise taxes beginning 2018. The bill has been adopted as the house committee on ways and means report.

In the meantime, the Duterte government needs at least P8 trillion to close the infrastructure gap over the next six years, according to the Department of Finance.

Supporters of the bill emphasize that if the low income sector will substantially reduce their consumption of cigarettes or will stop smoking altogether, the impact on the tax revenue will be catastrophic.

They also said that a two-tier approach will reduce the regressive effects of excise tax on tobaccos, and by regressive, they mean a bigger portion of the income of low-income earners is being taxed compared to higher-income earners.

They stressed that the unitary excise tax of P30 per pack is regressive because it indiscriminately applies to all consumers whether rich or poor.

On the other hand, the two-tier approach on cigarette taxes is more in line with the constitutional directive for Congress to evolve a progressive system of taxation wherein taxes are based on the ability of the taxpayer to pay, they added.

They meanwhile criticize those who say that a unitary excise tax rate on cigarettes is in keeping with the constitutional mandate that the rule of taxation shall be uniform and equitable as muddling the issue.

They cited several decisions of the Supreme Court that explained that a tax is uniform when it operates with the same force and effect in every place where the subject of it is found, that it does not signify an intrinsic but simply a geographical uniformity, and that the uniform rule does not prohibit classification for purposes of taxation.

And then of course there is the argument that the unitary tax scheme will only reward multinational cigarette companies who will benefit from seeing local cigarette manufacturers selling lower priced cigarettes hurting if the same tax is imposed on both higher priced and lower priced brands.

Our legislators will also have to consider the possible displacement of tobacco farmers and other Filipinos who depend directly or indirectly on the tobacco industry. We have learned that local cigarette manufacturers who will be affected by a unitary tax system buy even the lower quality tobacco leaves being rejected by the multinational companies. These leaves will still make good cigarettes except that because of the very high standards of other buyers, they are rejected. If these local manufacturers go under, then these farmers will have no market at all.

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