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Mining Revenues Unspectacular, Need to be Re-assessed

RA 7942, “An Act Instituting a New System of Mineral Resources Exploration, Development, Utilization and Conservation” was passed in 1995 and has since been touted as the enabling law for the revitalization of the mining industry.

Among the reasons put forward for the move to “revitalize” the industry were : its potential contribution to economic recovery and growth, to exports and foreign exchange earnings, to employment and to revenues that the government could utilize for development goals.

With the exception of exports, these expected contributions to the Philippine economy, have been, at best, modest. From 2005 to 2009, the mining industry accounted for an average of 4.2% of total Philippine exports. Its contribution to GDP during the same period, averaged at 1.2% and to total employment, 0.4 %. In addition, revenue statistics show that the actual contribution of the mining industry to government revenues is decidedly unspectacular.

Yes to sin tax reforms!

“From a societal concern, I say yes to the idea of an increase in sin taxes….As you know, these sin products have a health burden on the people.”

This was the statement of President Noynoy Aquino (P-Noy). His statement was an explicit signal to legislators to pass a law that will increase sin taxes and rectify the errors in the present law governing sin taxes.

The law on sin taxes needs to be overhauled. The sin taxes are not indexed to inflation. And the excise taxes on tobacco products especially are so convoluted, resulting in further erosion of revenues.

Statement of Support for P-NOY Regarding the Increase of Excise Taxes on Sin Products

We welcome the statement of President Benigno Aquino III to back reforms on excise taxes on sin products, including tobacco and cigarettes. In his statement, President Aquino said that, “From asocietal concern, I say yes to the idea of an increase in sin taxes.There are trade-offs. As you know, these sin products have a health burden on the people, and this health burden has a peso value.”

Year after year, tobacco-related diseases claim the lives of millions. Inthe Philippines alone, approximately 90,000 die every year or about 10 Filipinos every hour die from smoking-related diseases. [1] We believe that increased excise taxes, particularly on tobacco products, will not only address the economic costs by curbing tobacco usage, but also increase revenues for the government.

Political Capital

Political capital is precious, and it must be used well.

The Philippine Daily Inquirer (14 August 2010) reports that the P-Noy administration is “ready to sacrifice political capital” in implementing the imposition of the value-added tax (VAT) on road tolls. It is not just about the application of the VAT on the increased tolls of the South Luzon expressway (SLEx) but on the tolls of other expressways as well.

The news item quoted presidential spokesperson Edwin Lacierda: “In the short term, we’d rather be unpopular because in the long term we know that the [value-added tax] that will be collected will be used for the social services that we have promised.”

Tax Reforms and Collective Action

Tax reforms are most difficult to do. For one thing, the constituency for tax reforms, especially those relating to new taxes or increasing tax rates, is hard to find. For another thing, precisely because the constituency is narrow, legislators avoid being supporters, much less being champions, of tax reforms.

We have seen, for example, how Ralph Recto, who sponsored the law that increased the valued-added tax (VAT) from 10 percent to 12 percent, was trounced in the 2007 Senate elections. He has regained his position by joining the Noynoy Aquino bandwagon and by doing a complete turn-around—packaging himself as a populist by calling for measures (say, reduced oil prices) that make the whole population, especially the rich, happy, even if such measures aggravate the government’s fiscal problems.

And in the 2010 elections, Mar Roxas was painted as a firm supporter of the increase in the VAT rate. On the other hand, rival Jojo Binay projected himself as the creator of a socialist Makati, which he intends to replicate all over the country. This is Binay’s Makati that offers cash gifts, free movies, free groceries to senior citizens, even to those residing in Dasmariñas and Forbes Park, that has a state-of-the art hospital and modern clinics that are accessible to all, that provides not only free education but also free uniforms, textbooks, and school supplies to children.

The Tax Challenge

One of the critical binding constraints that the incoming Noynoy Aquino administration will face is the low tax effort. Tax effort, described as the amount of taxes collected as a percentage of Gross Domestic Product, has been dismally low during the Gloria Macapagal-Arroyo regime. In 2009, the tax effort was just 12.65 percent, far from the desirable 17 percent that was reached before the economy plummeted in the wake of the 1997 financial crisis.

What is ironic is that the tax effort has stagnated and even declined despite the fact that the Macapagal-Arroyo administration increased the excise taxes on sin products and jacked up the rate of the value-added tax (VAT) from 10 percent to 12 percent.

The increase in said taxes, among other things, was a forced move on the part of the Macapagal-Arroyo administration to avert a looming fiscal crisis after the highly controversial elections in 2004. The fiscal crisis was manifested in declining tax effort, increasing debt and debt-service ratios, and a yawning public sector deficit. It was triggered by overspending, unsustainable populist measures, huge losses incurred by government corporations, and non-implementation of tax reforms—all intended to favor political allies and vested interests as well as placate or woo voters.