Expert warns tax hike may backfire

CEBU, Philippines — A tax expert has cautioned the Cebu City Government against raising taxes amid economic pressures, persistent inflation and the looming threat of El Niño, warning that higher rates could burden businesses and taxpayers without necessarily generating the additional revenues the city expects.

At yesterday’s public hearing on the proposed revision of the city's Revenue Code, Dean Jonathan P. Capanas of the University of San Jose-Recoletos School of Law said that while local governments have the authority to adjust tax rates, officials must first consider whether the timing is right.

"We all know that currently our economy is not doing well," Capanas told councilors.

"If we increase taxes, it can further weaken an already struggling economy especially here in Cebu," he said.

Capanas, also a Certified Public Accountant, stressed that higher tax rates do not automatically translate into increased collections, particularly when businesses are already struggling financially.

"Higher tax rates do not necessarily produce higher tax collection because of our economic condition, many establishments could actually close shop and we have to take this into serious consideration," he said.

He warned that additional taxes could also weaken Cebu City's competitiveness and disproportionately affect smaller businesses and taxpayers with limited resources.

"The basic issue is: Is it timely? Is it necessary? Is it practicable? Is it beneficial for Cebu City at this point in time to increase taxes?" he said, stressing that “timing is very important”.

The hearing centered on a proposed overhaul of Cebu City's Revenue Code, which City Treasurer Emma Villarete said has remained largely unchanged since its enactment in 1993.

"Our tax code was enacted way back in 1993. That's 30 years ago," Villarete said.

Villarete said the revision is anchored on constitutional provisions and the Local Government Code, which authorize local governments to establish revenue sources and adjust tax rates within limits prescribed by law.

She clarified that the proposed changes do not involve across-the-board tax increases but also seek to update business classifications to reflect industries and economic activities that were not covered when the existing code was drafted.

"So dili siya tanan is raising, but we classify it accordingly based also on the nature of the business," Villarete said.

She also cited repeated recommendations from the Commission on Audit and the Bureau of Local Government Finance to update the city's revenue measures.

"There is also an annual or a repeated finding from the COA and the BLGF that recommendation of revision of our tax code because it's already old and it's due," she said.

Villarete said the city faces rising expenses as its population grows and demand for public services increases.

"The demands of the city government are also increasing. Number one, our population is increasing. The demand of services is increasing like for example in the case of the granting of the scholarship, the senior citizen, the PhilHealth and other public services," she said.

She cited waste management as an example of the gap between revenues and expenditures.

"For the garbage itself, we only generated only a P100 million with a cost of around a billion," Villarete said.

Despite tax mapping, inspections and collection drives, she said the city needs additional revenues to sustain efficient public service delivery.

Based on current collections of about P3 billion, Villarete estimated that the proposed revisions could generate an additional P300 million to P500 million annually.

However, Capanas urged the city to explore other revenue sources and review its spending priorities before imposing additional taxes.

"What happened now to the proceeds from the sale of the properties of our SRP?" he asked, calling for a review of potential non-tax revenues.

He said sound fiscal management requires not only stronger revenue generation but also prudent spending, proper prioritization and fiscal discipline.

"We have to balance the two to have sound fiscal management," he said.

Among his proposed alternatives were improving collection efficiency, reviewing government expenditures, expanding the tax base through economic growth and maximizing non-tax revenues.

He also emphasized that tax policies must consider taxpayers' capacity to pay.

The discussion also covered the potential economic impact of El Niño after Councilor Joel Garganera asked how extreme weather conditions could affect businesses and taxpayers.

Capanas said the anticipated dry spell should be factored into the city's decision on whether to impose additional taxes.

"That is in fact another factor that we need to consider because surely it's going to also affect our economy," he said.

He warned that prolonged extreme heat could drive up electricity consumption and operating costs while putting additional pressure on power supply.

"That will have a very big impact not only to the businesses but to taxpayers as well," Capanas said.

Councilors acknowledged the need to balance taxpayers' concerns with the city's responsibility to fund essential services, including programs for senior citizens and other beneficiaries.

Capanas proposed that if tax increases are eventually deemed necessary, they should be implemented gradually to give businesses and taxpayers time to adjust.

"Ability to pay matters even more during an inflation period," he said.

"If the new rate is even more than taxpayers can reasonably afford, you get resistance in the payments and other things, not extra revenue."

He suggested spreading the increases over several years rather than imposing them all at once.

"Instead of absorbing a sudden shock, inflation plus the El Niño, spreading it out keeps businesses time to adjust," Capanas said(CEBU NEWS)