Reopening the Sin Tax Law

Sometimes, a proposed tax imposition could be over the top. This time, and just perhaps, those normally associated with the “pro-tobacco” alliance may be taking a position that really makes sense even while serving their own interests.

Don’t get me wrong. I have always believed that tobacco consumption has no positive value for people, and can be extremely harmful to the young while creating a huge burden for the state’s health care system with the number of tobacco-related illnesses especially among the poor.

This column had actively supported the passage of the Sin Tax Reform Act of 2012 which was aimed at simplifying the law on tobacco and liquor taxation, and thus raise more funds for government health programs, and at the same time, dampening cigarette smoking and alcohol dependence.

On the first year of implementation, income from the reformed tobacco taxation more than doubled, and by 2015, had tripled to P100 billion. On the other hand, study results showed that cigarette use among adults had declined by close to 25 percent from 2009 levels.

With pro-active initiatives, the Bureaus of Internal Revenue and Customs were able to contain any widespread smuggling of cigarettes and tobacco that would have reduced the gains of the Sin Tax Law.

Careful calculations

The success of the Sin Tax Law was the result of diligent teamwork and an untiring resolve to overcome all the arguments that the pro-tobacco believers spewed in Congress, through media, by hired lobbyists, and even with paid advertisements.

There was a lot of pencil-pushing done, because one of the biggest considerations was in calculating the best acceptable tax table that would generate revenues without killing the industry and tobacco farmers, yet act as a price deterrent on potential, new and existing cigarette users.

Thus, instead of immediately adopting a unitary rate system, the four-tiered taxation before the law was reduced to two on the first year, and to one rate only in 2016.

The increase in excise tax rates on the first year of the Sin Tax Law was “harshest,” from P2.72 to P12, representing a four-fold increase, but it was a calculated risk that was not going to kill the goose that laid the golden egg. In 2017, the tax had been raised to P32.50, with a proviso for adjustment of four percent every year to take care of inflation starting 2018.

Attempts to change the Sin Tax Law

The World Health Organization, one of the staunchest supporters of the use of taxation as a means towards curbing tobacco and alcohol consumption, is cheering on our Congress in its latest attempt to raise taxes on sin products.

But in doing so, it may inadvertently open a Pandora’s box, or worse, take back all the gains that have been earned during the last six years that the Sin Tax Law has been in effect.

Even with the signing of the law in 2012, tobacco companies have not stopped at attempting to reopen discussions at the legislative level on the possibility of introducing changes to the tax structure on cigarettes. They had unsuccessfully tried in 2016, but this did not mean that they would not make a crack at it again.

Last year, with the push to pass the Universal Health Care (UHC) bill, a new opportunity opened up. The Department of Health called for higher tobacco taxes to fund a supposed shortfall in the cost of implementing the proposed law that promised health care for all Filipinos.

The UHC, once signed into law, would entail state spending of around P257 billion on the first year of implementation, but the existing budget allocation is only P164 billion, hence a shortfall of a little below P100 billion. According to the DOH, this could come from increasing tobacco taxes to P90 per pack, which is about three times more than current levels.

Four bills were subsequently filed in Congress supporting the health department’s position, two each for the House and Senate, each proposing changes to the current sin tax law by introducing higher taxes.

While tobacco firms as well as tobacco farmers and their representative local governments issued protests to higher taxes, the bigger danger lies in reopening discussions on the law – and perhaps finding a way to retool the current taxation structure to something more favorable for the tobacco industry.

On the other hand, the well-oiled machine of anti-tobacco supporters may be able to avert any underhanded changes that would derail the gains already achieved by the 2012 sin tax law.

Finding the right number

The real issue, though, is pricing. How much really should tobacco taxes be to achieve the maximum desired revenues while bringing down consumption of cigarettes?

WHO says that for excise taxes to be effective, it should at least be 70 percent of retail prices. Following this would significantly raise the price of cigarettes, and force many current users to give up the habit. This would also lead to significant reduction in death and diseases resulting from cigarette smoking.

The country’s National Tax Research Center, on the other hand, in its recently concluded review of the Sin Tax Law, had categorically ruled that the proposed bills filed in Congress to raise excise taxes to P60, more so P90, was too high.

While the review noted that the ratio of excise taxes to retail prices is still below WHO standards, it recommended gradual increase in tax rates. Emphasizing on the word “gradual, to this we fully concur.

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