Will good intentions prevail over 'sin' lobby?

The battle lines have been drawn; debates are raging, and the process to reform the excise tax of “sin” products, specifically of cigarettes, is on.

The stakes are not peanuts. On one side, the government is looking at total revenues in the amount of about P300 billion over a period five years: enough funds to launch a universal health program, build thousands of kilometers of paved roads, thousands of school rooms, amelioration program for tobacco farmers, and other social protection.

On the other side, the group that controls over 90 percent of the cigarette market, the merged company of Lucio Tan’s Fortune Tobacco and multinational giant Philip Morris International, or PMFTC, is strongly pushing for the extension of the status quo, where the excise tax structure gives their cigarette brands discriminatory protection that they have enjoyed for the past 15 years.

More years of tax savings

Chris Nelson, president of PMFTC, was reported as reiterating a call to the government to extend the current excise tax law for cigarettes for another five to six years. Nelson said that if the government raises tax on cigarettes, the industry may not be able to cope, which will jeopardize the jobs of 2.7 million people employed by the industry.

Clearly, the current excise tax structure (RA 8240) extends preferential treatment to PMFTC cigarette brands that have over 90 percent share of the market; its extension by five or six more years will provide immeasurable benefits to PMFTC. 

Under the current excise tax structure, the brands of PMFTC are listed in Appendix D of RA 8240 which pegged the retail price of 1996 as the basis for imputing excise tax on these PMFTC cigarette brands. Although retail prices of these cigarette brands increased during the past 15 years, tax being paid is still based on 1996 retail prices. Definitely, a substantial tax savings not to be given up easily. 

Need to reform

The government, however, is not for the extension of the current system but is pushing for its drastic revamp. The government panel composed of Health Secretary Enrique Ona, Finance Undersecretary Jeremias Paul and BIR Commissioner Kim Henares, among others, that attended the recent hearing of the Ways and Means Committee chaired by Rep. Isidro T. Ungab were trying to convince the congressmen to support the government’s move to reform the cigarette excise tax system.

Apart from the huge amount of revenues that will be raised, the government expects other benefits that will be derived from the passage of a reformed excise tax regime.

In a recent briefing, Finance Secretary Cesar Purisima was quoted as saying that, “we have a situation right now where the present rules have created practically a monopoly where one company (PMFTC) has a market share of more than 90 percent.”

Purisima added that the government wants to repeal the provision of the law to achieve a level playing field and removing the Appendix D of RA8240 that extends discriminatory protection to certain brands is a priority.

Removing protection to a monopoly

The discriminatory protection given to Philip Morris and Fortune Tobacco cigarette brands enabled PMFTC to pay excise tax based on 1996 retail prices despite increases in retail price during the past 15 years. Other new brands not listed in Appendix D are assessed based on their current retail prices.

The removal of “discriminatory protection” will lift the entry barrier and will encourage investments by new entrants to the market. With more competition in a “level playing field” market, the monopoly will be dismantled.

The government has taken the view that a “level playing field” in another industry sector, similar to what was done in the telecom and airline sectors, will further enhance the image of the country as an open economy with fair trade rules.

More job opportunities

Looking at what transpired in other sectors that were opened to competition, it was evident that more job opportunities were created. While the previously dominant player may cut some positions due to reduction in market share, new jobs and positions are made available as new entrants compete in the open market.

Cebu Pacific, competing against the previously dominant player, Philippine Airlines, is a classic example of what can transpire when government policy allows the liberalization of trade and open a previously closed industry sector. Cebu Pacific added more flights and developed new routes, activities which created more jobs.

Response to health issues

The reform of the cigarette excise tax being pushed by the government is also in response to critical health issues. According to several DOH and World Health Organization (WHO) studies, the cost to the country of smoking induced diseases and ills, in terms of health care and productivity losses, is estimated between P220 to P460 billion. Worse, those affected belong to the lower levels of the income strata, and subsequently pose a higher burden on the public health care system.

The very low tax makes cigarettes easily accessible to young smokers causing an alarming increase in young tobacco smokers who are very vulnerable to smoking ills. The recent Global Youth Tobacco Survey showed an increase of 40 percent in young smokers within a span of four years.

As presented by DOF, a portion of the incremental revenue to be raised by the proposed reform will be used to launch a universal health program and for other health promotion campaigns to be conducted on the national level by DOH and Department of Interior and Local Government (DILG). On the local level, health promotion may be undertaken by local health officials or boards.

Political will versus anti-reform lobby

With the battle lines drawn and each side pushing their respective agenda unleashing their barrage of arguments to capture the minds and support of the congressmen, the question is who will prevail.

Will the Northern Alliance composed of representatives from tobacco-growing provinces and the anti-reform lobby be successful in extending the existing system that provides for very low tax specifically for the protected brands?

Or will the current crop of young and still idealistic legislators and political leaders, led by a self-confessed smoking habitué (our President, himself), overcome the pressure of a strong anti-reform lobby and champion a bold move to reform the “sin” tax law for the good of the Filipino nation?

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