New tobacco tax being railroaded

It takes a long time for bills to pass Congress except when there are enough incentives (wink wink) for our legislators to act quickly. A newly filed bill was passed on second reading last Wednesday in just two meetings in less than a week. Amazing!

The bill is not officially certified by President Duterte as urgent (unlike the transpo emergency power). It is also opposed by government agencies tasked to implement it… DOF, DOH, BIR and the National Tax Research Center. Only one of the local tobacco companies is in favor of this bill.

There is apparently a mighty strong lobby for a bill that calls for the retention of the two tier system for taxing tobacco. No less than the Speaker, the Deputy Speakers and the Majority Floor Leader are spearheading the bill’s approval.

The bill threatens to sabotage the administration’s program to raise tax revenues to cover the losses from the tax reform program earlier submitted by the Department of Finance. It will also make tax administration more difficult and more susceptible to corruption and tax evasion.

What they should have considered is an alternative bill filed by Rep. Joey Salceda which has the capacity to raise those needed revenues. But Salceda’s bill was totally ignored.

Here is a bit of background:

The Sin Tax Law (RA 10351) passed in December 2012 achieved its goals of 1) curbing cigarette and alcohol consumption, 2) enhancing revenues for government programs, including for health, through the increased taxes on cigarettes and alcohol and the reduced categories or tiers of cigarette taxes from five to two, and into just one by 2017.

By Jan. 1, 2017, the Sin Tax Law mandates a unitary tax rate of P30 per pack of cigarettes regardless of brand or price. The Sin Tax law reduced the gap between the tax rate imposed on high and low priced category cigarettes every year until the gap reaches zero by 2017.

 The Sin Tax Law is in line with our commitments under the first international health treaty, the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), to reduce smoking prevalence and raise revenue to expand health services, specially to those suffering diseases because of smoking.

The bill being railroaded will not reduce smoking, and may negate the objective of discouraging smoking for health reasons. It will abet uncompetitive behavior among the tobacco companies.

Why is the House in a great big hurry to pass a bad bill? I guess because time is of the essence. Christmas is here and constituents want more than a handshake from their ninongs.

Who could be behind such a bad bill? Well… a review of the local tobacco industry provides a clue.

There are really only two protagonists of note these days. One is Philip Morris Fortune Tobacco Corporation, a joint venture of Lucio Tan and Philip Morris. The other is Mighty, an upstart suspected of unfair competition via a favorable revenue regime during the P-Noy watch.  

All the other cigarette companies favor the unitary tax rate. Only Mighty is in favor of the bill being railroaded.

From the stories I heard, it seems Mighty’s convincing power with Congress was something Fortune used to enjoy. But with Philip Morris as partner, Fortune or Lucio Tan is now forced to play everything by the book.

An American company, Philip Morris is subject to the very tough US anti-corruption laws. All Fortune can do now is complain about Mighty’s tactics. They have been complaining loudly during the Aquino administration. Even high US officials talked to P-Noy and showed him data on Mighty, to no avail.

Who will benefit from the law that congressmen are railroading now? Mighty has more to gain. But if push comes to shove, Fortune should be able to downshift some of their brands to benefit from the two-tier system too. The clear loser is the Philippine treasury with less taxes coming in. Corruption will also be easier with two tiers than if we had a unitary or just one tax rate.

The congressmen railroading the two-tier bill argues that the uniform tax rate will reduce the difference between high-priced and low-priced cigarettes. This, they say, will make consumers buy the higher priced cigarettes, which require high-quality tobacco leaves.

This, they claim, will encourage cigarette manufacturers to import tobacco leaves instead of buying locally grown tobacco leaves (especially low grade tobacco). So, they say, having a one tax rate will displace more local tobacco farmers.

Will local leaves be substituted by imports once we implement unitary cigarette taxes as the congressmen claim? The data says otherwise.

Our experience showed that even as the difference between low-and high-tier tax rates narrowed from P13 to P7, from 2013 to 2015, volume of imported tobacco did not increase, but even declined by 45 percent.

Indeed, data shows that local tobacco farmers are exporting most of their production, something that surprised me too. Over the past four years, around 70 percent of local production went to exports of unmanufactured tobacco. When tobacco exports declined by around 15 million kilograms from 2013 to 2015, local production declined by 17 million kilograms

So, HB 4144, the one being railroaded now, will not automatically benefit local farmers. Consider further that Philip Morris Fortune imports 3.5 million kgs of unmanufactured tobacco and produces 68.6 billion sticks. The share of imported tobacco per stick is five percent. Mighty imports 2.3 million kgs, produces 8.7 billion sticks, portion of imported tobacco 26 percent.

The congressmen promoting HB 4144 also claim to promote progressive taxation. Progressive taxation is when one is taxed according to his ability to pay: higher income means higher tax.

But when a middle class or high-income class smoker switches to the cheapest brand with low tax, then his/her tax burden becomes lower than what he could have paid.

The health factor was also highlighted during that 2012 battle to pass the Sin Tax Law: the poor are the most vulnerable sector in terms of smoking related diseases and least able to get proper medical treatment. Thus, we need tax policies that can encourage behavioral changes among the poor such as reducing consumption or quit smoking altogether.

Most important considerations have to do with total tax collection and ease of administration. On both counts, the single or unitary system wins hands down.

And if the proposal of Rep. Joey Salceda is adopted, a unitary tax rate of P40, there will be even more money to help the farmers since Joey allocates 20 percent of incremental revenues to help farmers. In actual numbers, the earmark for farmers will increase to P13.1 billion.

A unitary tax system is best for administering the tobacco excise tax because it prevents corruption and tax avoidance. It would ease, as the World Bank observed, “administrative difficulties of classifying cigarettes by declared value and focus more on observed volumes.” It removes the need for authorities to classify brands according to tiers, which is open to corruption and abuse.

Finance Secretary Sonny Dominguez has kept his head very low on this issue even if the DOF tax experts are against it. This is understandable because Sonny is facing a big battle for his tax reform program.

 But one of his usecs is Karen Singson, daughter of the northern alliance bigwig, Eric Singson. And the DOF spokesperson is Paola Alvarez, daughter of the Speaker. 

Even if President Duterte hates smoking, it is possible that this bill being railroaded is also an accommodation of the Duterte administration to please the northern alliance. Bonget Marcos, after all, is part of the northern alliance.

I share the view that a damaged tobacco tax reform program sends a very bad signal for the comprehensive tax reform package and other reforms the Duterte administration says it wants to do. This means we cannot expect substantial and meaningful reforms under this Congress. That, in turn, will affect investor confidence and credit ratings.

We can be sure the congressmen are on steroids for the bill’s passage not because they want to help farmers. We all know who they want to help in this season of gift giving. Our politics is so hopelessly predictable.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco