Sin taxes

The Senate is in the process of passing a bill that will raise the taxes imposed on cigarettes with the intention of using the proceeds to fund the so called Universal Health Care. The range of the new tax is from P37.50 to P90 per pack based on proposed bills filed by different senators.

Last December, the House of Representatives approved a P37.50 per pack tax rate from the current rate of P35. The Department of Health and the Department of Finance are supporting the version proposing P60 per pack.

I have never smoked in my life, thanks to the influence of my late father who smoked during his younger years, his being a doctor notwithstanding. He kicked the habit by the time I was growing up and he continually talked to me about how smoking tobacco leads to many diseases.

My wife, who smoked a pack in her younger years, has also kicked the habit after she became a born again Christian. I want to assure my readers that I have no axe to grind in this debate. They can raise the tax to a thousand pesos a pack and it will not affect me or the family budget.

From the on-going debate, there are two objectives of the tax raising proposal which may be conflicting. If the bill seeks to reduce the number of smokers by making the cost of cigarettes beyond their means, that is a good public health objective.

But if the main purpose is to raise funds for the Universal Health Care program, I am not sure the objective can be achieved. Basic economics and human behavioral observations make me wonder if cigarette smoking is as inelastic as they seem to be assuming.

Inelastic demand means that demand for a product or service barely moves no matter how high the price may be. Smoking is a bad habit that is difficult to break. Is it reasonable to assume smokers will buy less food, see fewer movies and save whatever they can to meet the increased cost of cigarettes?

Then again, a worker with five children who earns P500 a day will find it extremely difficult to continue with the smoking habit. He will probably look for cheaper substitutes or in worse cases, may make his children go hungry or stop schooling so he can continue to smoke.

The economy is however always dynamic. When something disrupts the supply and demand balance such as an increase in retail prices due to higher taxes, the market will find ways to get relief. If the demand is strong enough such as one coming from habitual smokers, the underground market starts moving.

Smuggling will increase as a response to the higher tax. Given our long coastlines, lack of coastal defense and corrupt customs and coast guard officials, smuggling is not difficult to do. When this happens, the smokers continue to smoke and the government collects less in taxes.

Our officials should always be careful when they use taxes to achieve goals other than just the optimum tax revenue level for a product or service. When I was at the Ministry of Energy, we introduced what we called a socialized pricing policy for petroleum products.

What this means is simple: diesel is used by jeepney drivers and commuters and must be protected by lower taxes; gasoline on the other hand is used by car owners who can afford to pay a higher per liter cost on their fuel.

While socialized fuel pricing may sound reasonable in theory, the market found a way around it. Because the domestic diesel price is so low, there was incentive for traders to buy local diesel and smuggle that out for sale in neighboring countries.

Similarly, because gasoline price here is so much higher, smugglers brought lower priced gasoline from our neighbors for sale here. We lost both ways. We were subsidizing foreign diesel users and we were not collecting as much taxes on domestic gasoline sales.

Maybe if we had honest law enforcement, we won’t have the smuggling problem. But the one assumption a bureaucrat must never assume is honest law enforcement.

Supporting Universal Health Care is a laudable objective. But there is no easy way of funding this program by simply imposing a tax on tobacco and alcohol. Money will have to be set aside from other sources otherwise it will be as ineffective as PhilHealth is in covering our health needs.

Health care should be a big issue in this country because it is so inadequate for all levels of society except those who have the means to go abroad to get theirs. Indeed, it is the middle class that suffers the deadly impact of inadequate and unaffordable health care the most.

Senior citizens feel the greatest insecurity because upon retirement, they lose the health care coverage provided by their companies. Yet, it is upon retirement that one needs a lot of health care. I am not sure one can save enough to respond to a catastrophic illness without putting a burden on family members.

Sure, the Philippine Charity Sweepstakes provides some financial assistance to cancer and other patients but we need a more systematic approach that is not subject to bureaucratic discretion or political intervention.

I can think only of UP-PGH, overburdened as it is, as the only medical center where it is possible to get high quality medical care at an affordable cost. The big private medical centers are profit oriented and since many are also doctor-owned, conflicts of interest in patient care can be a problem.

The next Congress should start a conversation not just on how to fund Universal Health Care but more importantly, how to assure every Filipino gets good medical care at an affordable cost. Until then, we all have this nagging fear of dying due to illness or dying after you get your hospital bill. 

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