Flawed tobacco tax system

If our government thinks that they have successfully reduced tobacco smoking rates just because they increased tobacco excise taxes, then it is kidding itself.

If our government economic and finance managers believe that the collection of tobacco excise taxes has been declining because there are fewer people smoking, then they are deluding themselves.

The sad reality is that while tobacco taxes have increased, collections haven’t, and this is because fewer people patronize the higher priced tobacco products that pay the correct taxes while more consumers are buying the lower priced smuggled ones which do not pay taxes and duties.

Since Republic Act 10351 or the Sin Tax Law’s enactment in 2012, tobacco taxation in the Philippines has followed a simple path: raise taxes, reduce smoking rates and fund health care. On paper, it’s a virtuous cycle but in reality, it’s fueling a thriving illicit market.

The law provides that for tobacco products, an excise tax of P1.75 per kilogram shall be collected effective Jan. 1, 2013, and this rate shall be increased by four percent every year effective Jan. 1, 2014.

In the case of cigarettes packed by machines, the law imposed a tax of P25 per pack if the net retail price excluding excise tax and value-added tax is more than P11.50 per pack, effective Jan. 1, 2013, increasing to P30 per pack tax by Jan. 1, 2017 and this rate shall increase by four percent every year thereafter effective Jan. 1, 2018.

Meanwhile, according to the Bureau of Customs (BOC), the excise tax rate on heated tobacco products as of Jan. 1, 2023 is P32.50 per cigarette pack and this rate shall be increased by five percent beginning 2024 onwards.

For cigarettes packed by machine, the excise tax rate is P60 per pack of 20s beginning Jan. 1, 2023 to increase also by five percent every year starting Jan. 1, 2024 and onwards. Cigarettes packed by hand are subject to the same rate.

The current tax structure is so misaligned with market behavior that it punishes law-abiding players and rewards smugglers. Excise revenues have stagnated, while illicit trade in both cigarettes and vapor products is exploding. Instead of reflexive tax hikes, the government must rationalize the tax system to close loopholes, balance rates and restore fairness.

The Bureau of Internal Revenue (BIR) collected only P134 billion in tobacco excise taxes in 2023, or nearly P51 billion below its target. Despite higher taxes, revenue isn’t growing because legal sales are plummeting – not due to mass quitting, but because consumers are turning to untaxed illicit products.

Cigarettes are a case in point. The Department of Agriculture lists the cheapest legal pack at P125. A check of the selling price of cigarettes online revealed that Puregold, for instance, is selling Fortune Menthol for P1,522.50 per ream or around P152 per pack.  SM Supermarket ‘s selling price for a pack of Marlboro red is P179.

On the other hand, illicit versions are sold for P30 to P80 in markets and online.

The price gap has fueled the growth of illicit cigarettes from 8.1 billion sticks in 2020 to 11.5 billion in 2025, per Euromonitor estimates. The black market isn’t just an underground nuisance – it’s become a parallel economy.

The situation with illicit vapes is similarly grim. More than P5 billion worth of illicit vapes were seized in early 2025 alone, according to the BOC and BIR. But seizures barely scratch the surface.

The root cause may be a broken tax structure that incentivizes fraud. Freebase nicotine is taxed at just P6.62 per milliliter in 2025, while nicotine salt carries a rate of P57.30 per milliliter. That’s a nearly 10-fold difference for similar products. The result is widespread misdeclaration, with sellers labeling nicotine salts as freebase to pay less tax.

Vape users have soared from 200,000 in 2021 to 1.9 million in 2025, according to the Food and Nutrition Institute. But tax-paid volumes haven’t kept pace. The market is growing, but not in the legal channels.

Last February, lawmakers passed House Bill 11360 to address the issue of misdeclaration of vapor products. The bill proposes to unify the tax rate for all vapor products – regardless of nicotine type or content – at P66.15 per ml. This aligns with the tax on a pack of cigarettes and closes the loopholes being exploited by illicit traders.

However, the proposed P66.15 per ml rate should also be rationalized. Given that vape pod volumes range from 2ml to 10ml, this translates to an effective tax of P132 to P660 per pod – an excessively high burden that may push consumers further into the illicit market.

House Bill 11360 also proposes adjustments to the annual excise tax increases: two percent in even years and four percent in odd years, replacing the current automatic five percent hike. This change reflects market realities and aims to curb illicit trade while still raising revenue. The bill is now awaiting action in the Senate.

This reform is urgently needed. The Laffer Curve suggests that beyond a point, higher taxes reduce revenue. We’ve passed that point. Tobacco excise collections dropped from P176.5 billion in 2021 to P160.3 billion in 2022, and to P134.9 billion in 2023  –  even as rates rose. We’re taxing more and collecting less.

Meanwhile, smoking prevalence is rising. FNRI data shows that adult smoking grew from 19 percent in 2021 to 24.4 percent in 2023, with 16.4 million adult smokers today. Clearly, tax hikes that were meant to reduce smoking have instead made illicit products more accessible and reversed gains.

The problem isn’t taxation itself, but the structure. Simplifying the current tax structure has become an urgent issue. To restore credibility to our public health and revenue efforts, I believe there are three critical steps to note.

First, unify vape taxes. The massive disparity between freebase and nicotine salt invites fraud. House Bill 11360 addresses this decisively by taxing all vape liquids at the same rate, though the rate itself must be lower than proposed to avoid further black market expansion.

Second, recalibrate cigarette taxes. The gap between legal and illicit prices is unsustainable. Without strong enforcement, high taxes push consumers to cheaper, smuggled products. Temporarily suspending the automatic tax hike on tobacco could stabilize the market, protect revenue and buy time to strengthen enforcement.

Third, modernize enforcement. Stricter online sale monitoring, better customs coordination and stronger regional government to government cooperation are crucial. But enforcement alone isn’t enough. A rational tax structure must lead.

This is not abandoning public health but refining the strategy. The goals of reduced smoking and higher revenue are being undermined by a structure that punishes compliance. Aligning tax rates with market behavior, simplifying the system and strengthening enforcement will help regain control.

A rationalized tax system curbs illicit trade, supports government revenue and restores the integrity of the Sin Tax Law. The current structure does none of these. It’s a smuggler’s windfall and a policymaker’s failure.

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