Policymakers may consider additional excise taxes — NTRC

MANILA, Philippines — Policymakers may still consider increasing taxes on excisable items either to generate more revenues for the government or to discourage consumption of such products, according to a government think tank.

In a report, the National Tax Research Center (NTRC) said demand for excisable products, such as cigarettes, alcoholic beverages, petroleum products and automobiles are largely unresponsive to changes in prices.

This means that proposals to increase taxes on these products would not necessarily result in a significant decrease in demand, and would yield additional revenues for the government.

According to NTRC, cigarettes are price inelastic with a coefficient of 0.84, which implies that for every one percent increase in the price, demand will only decline by 0.84 percent with income held constant.

“This result proved the addictive nature of cigarette smoking, thus any attempt to increase its price would only result in a minimal reduction in demand,” the report said.

For alcohol products, fermented liquors were price elastic at 1.42, while distilled spirits and wines were inelastic at 0.96 and 0.12, respectively.

Petroleum products were also found to be inelastic – with diesel at 0.09, gasoline at 0.24 and liquefied petroleum gas at 0.23 – since these are considered necessities, according to the research institute.

The NTRC said demand for automobiles was also price inelastic at 0.87.

In addition, the NTRC’s analysis also found that excisable products, especially cigarettes, fermented liquors, diesel and automobile are income elastic, which means there is an increase in consumption for every increase in consumers’ income.

“The foregoing price and income elasticity results indicate a degree of responsiveness of the consumers’ demand for selected excisable products to changes in price and income,” the think tank said.

“The more inelastic the demand is for a certain product, the larger the excise tax revenue that can be generated from that product. The more elastic the demand, the easier it is for consumers to reduce quantity instead of paying higher prices,” it said.

The NTRC then said policymakers should consider taxation as a tool to address the social cost of consuming excisable products.

“Although the increased excise tax on alcoholic products was seen to have a low effect on consumption, increasing excise tax on alcoholic products may still be considered to discourage alcohol consumption,” the NTRC said.

The NTRC said the government may also opt to impose additional tax on automobiles in the future since they are price inelastic. The additional revenues may be used to improve public transportation in the country.

As for petroleum products, the NTRC said any increase in excise tax would be more effective if there are substitutes for fuels for the transportation and manufacturing sector. It should also be done slowly and predictably over time to prepare consumers of long-term higher prices.

The government has already raised the excise tax on cigarettes, fuel, and automobile under Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Effective Jan. 1 this year, the excise tax on tobacco products was further increased to P45 per pack pursuant to Republic Act 11346.

The Congress also recently approved a bill, which seeks to increase taxes on alcoholic drinks, vapors, and heated tobacco products.