No New Taxes Yet (Part 2)

Sta. Ana coordinates Action for Economic Reforms. This piece was published in the July 11, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

 

The biggest resistance to sin taxes comes from the tobacco industry.  The title of a paper co-authored by K. Alechnowicz and S. Chapman (2004), which came out in the international peer-reviewed journal Tobacco Control, says it all: The Philippine tobacco industry: “the strongest tobacco lobby in Asia.”

The Alechnowicz and Chapman paper documented “revelations from internal tobacco industry documents about the conduct of the industry in the Philippines since the 1960s.”  Political corruption was among the areas explored.

As part of the abstract, the authors wrote:  “The Philippines has long suffered a reputation for political corruption where collusion between state and business was based on the exchange of political donations for favorable economic policies. The tobacco industry was able to limit the effectiveness of proposed anti-tobacco legislation.”

Nothing much has changed since this research paper was written in 2004. Solita Collas-Monsod picked up from where Alechnowicz and Chapman left off.  In a series of columns written for BusinessWorld (8, 15, and 22 June 2011) Ms. Monsod narrated how the tobacco industry in recent years has undermined tax reforms, how tobacco farmers have been exploited, and how earmarked funds ostensibly for the benefit of tobacco farmers have been misused.

Being “the strongest tobacco lobby in Asia” also means that the tobacco industry can employ the most sophisticated and most clever ways to protect or advance its special interests.

Let us return to the statement of President Noy Aquino about having “no new taxes yet.”  Of course, this makes the tobacco industry happy.  And surely, the tobacco industry will not wait for the moment that the Executive will introduce new taxes on sin products to intensify its lobby.

The taxes will soon come. The strategy of the tobacco industry is to take the offensive at this stage that the Aquino government has taken the line of “no new taxes yet.” The offensive takes the form of rushing a weak consolidated bill in the Lower House.  As part of the deception, an essentially weak bill is being dressed in reformist clothing.

Specifically, the bill being favored by Representative Hermilando Mandanas, the chairman of the Ways and Means Committee, calls for an updating of prices upon which the taxes are going to be based.  It is not clear however what the new price levels will be.  Worse, the Mandanas bill excludes an indexation of the specific tax to inflation. The effect then is a one-off increase in taxes, but the real value of the taxes will be eroded again by inflation.  The Mandanas bill likewise retains the complicated multi-tiered tax system, which is insensitive to the health objective of preventing smokers from merely shifting to a higher-priced brand to a lower-priced one.

The representatives of the tobacco industry also invoke the urgency of having such a bill passed, using a smart but cunning argument that government loses much-needed revenues for each day that a new law on sin taxes is delayed. A press release (9 June 2011) from the Office of Representative Hermilando Mandanas, reads:  “On pending excise tax proposals, Rep. Mandanas stressed that the government is incurring losses of P200 million daily for every day of delay in the adjustment of excise tax rates on cigarettes and alcohol products.”

We are in full agreement with Representative Mandanas regarding the urgency of reforming the sin tax law.  But we reject a law that does not contain the three essential, non-negotiable features; to repeat— 1) the indexation of the sin taxes to inflation, 2) the adoption of a simplified unitary tax for tobacco and alcohol products, and 3) the removal of the price classification freeze.

To neutralize the strategy of the tobacco industry in rushing or railroading a weak consolidated bill in the Lower House, it is imperative for the Aquino administration and the House leadership to direct the Ways and Means Committee to craft and endorse a consolidated bill that features all the reform elements cited above.

We must learn our lesson from previous legislation.  It is not enough to increase the sin taxes, in which the gains are short term.  In 1997, the reform to shift from an ad valorem tax (which was vulnerable to under-declaration of prices) to the simpler specific tax was not accompanied by indexation to inflation. In 2005, the rates of sin taxes increased, but indexation was still absent and worse, the classification for older cigarette brands upon which the tax rate was applied was frozen at 1996 prices.

Yes to the Mandanas appeal to give urgency to the passage of the bill on sin taxes.  But definitely a resounding No! to a weak consolidated bill that Mandanas is advocating.

 

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