Growing threats to Sin Tax reform

With the higher taxes arising from the new Sin Tax Reform Law passed end-2012, two unshakeable facts have emerged. First, that the now more expensive alcohol and tobacco products are still popular consumer items, what with continued patronage by local customers in 2013.

Second, that the government is collecting much more than it originally estimated from levies on the sale of liquor and cigarettes, and that this should increase further in the next years as the industry moves forward to a unitary tax scheme.

The first is a not-so-good news for anti-smoking and drinking advocates who rightly regard these two vices as societal ills that burden the public health care system with sick people who can ill-afford to pay for their own medicines and hospitalization.

 The second, of course, is a boon for the regime of Bureau of Internal Revenue commissioner Kim Henares who, despite all the hard work and mighty guts spilled last year running after errant tax payers, will most likely still not meet her overall collection target.

In the coming years, health advocates are praying that smoking and drinking habits will finally be curbed especially among the youth as cigarette and liquor prices are further ramped up.

Thwarting new changes in law

But if one would think that the tobacco and liquor manufacturers are going to give up that easily without a fight, this would be fatal thinking. In fact, last year, a cigarette manufacturer that was hardly noticed before by the big cigarettes companies introduced dirt-cheap cigarettes in the market that threatened the market share of Philip Morris and Fortune Tobacco, erstwhile market leaders, but more importantly, undermined the health objectives of the new Sin Tax Reform Law.

This year, expect new and old tobacco industry members to come up with more “innovative” marketing strategies to keep their sales afloat. Yes, it will be a fierce war that will be waged to keep our youth supplied with cheap cigarettes.

There are also attempts to introduce changes in the current sin tax law, particularly in realigning the controversial tax tables by making them “less harsh” on consumers and consequently more favorable for the threatened profitability level of tobacco and liquor companies.

Tobacco lobby funds

This development is particularly disconcerting with the Supreme Court’s decision to ban the appropriation of the Priority Development Assistance Fund or pork barrel for lawmakers.

With a significant part of the discretionary funds of senators and congressmen removed from their annual allocations, lobby funds will become the primary source of slosh funds by lawmakers who are either still trying to recoup their 2010/2013 election spending or save for the coming 2016 race.

The tobacco industry is still considered one of biggest sources of lobby funds, which is why the reform of sin taxes that were ultra-favorable to the industry in the past took decades to change. Even with the 2012 amendments, sin taxes in the Philippines are still considered one of the lowest in the region.

Despite expressed fears by some tobacco industry members, particularly farmer growers, that the tobacco industry is in danger of extinction, the current developments among manufacturing companies reflect a different disposition.

Market war

The Lucio Tan group, which has been in partnership with Philip Morris Philippines Manufacturing Inc. since 2010 to create a virtual monopoly of the cigarette industry, is rumored to have decided to take a more active role in their joint business.

The tobacco business has been one of the strongest revenue earners of the Tan empire, and its deference to its American partner in running the business in the last three years had been viewed as a weak point in their relationship.

Lucio Tan himself, who built his empire with Fortune Tobacco in the previous century to expand to other businesses, is particularly possessive about upstarts in the industry that have recently been trying to undermine the monopoly’s hold.

The name of the game, according to sources, is to bring back the industry to pre-2012 or before the reformed Sin Tax Law was signed and sealed – or to a condition that close to what it had been.

This would mean re-amending the new law, and an opportunity for big lobby play involving large amount of resources.

Health cost burden

There are warning signs already, even as the expected revenues that the government is getting from the revised Sin Tax Law this year is far from adequate to cover for the health bill posed by ills attributed to excessive smoking and drinking.

The new Sin Tax Law was meant to raise the retail price of cigars and cigarettes beyond the reach of adolescents who are considered the most vulnerable to smoking risks.

But with the aggressiveness of a player that has been able to price its cigarettes at very affordable rates, the market is in danger of being flooded once again by cheap brands. In fact, the Tan group is rumored to launch a new brand that will answer this competitive threat.

In the meantime, all these antics will undermine the health benefits that had been expected from the new anti-sin law, and will not help curb the burgeoning public health spending that goes to treating chronic diseases that otherwise could have been prevented by an adherence to healthy lifestyles.

No to amendments, tax anomalies

This is why the government must resist all possible attempts to amend the current Sin Tax Law. Opening the Congress floors to even suggestions of a review will put to waste all the efforts made in the last years to come up with a reasonable tax structure for the tobacco industry.

In the case of new players that are opening channels in low-end markets and pricing cigarettes at absurdly low levels, the government must quickly find the real reason for this suspicious trade and immediately put a stop to any anomalies.

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