This piece was published in the February 6, 2012 edition of the BusinessWorld, pages S1/4 to S1/5.
In a rushed, madcap meeting of the National Internal Revenue subcommittee held at the House of Representatives on 30 January 2012, a substitute version of the sin tax bill was signed and approved by 10 legislators, led by the subcommittee’s chair, Representative (Rep.) Eric Singson Jr. of Ilocos Sur.
The substitute bill consolidates the salient facets of the bills previously filed by Rep. Hermilando Mandanas and Rep. Singson on the excise tax for alcohol and tobacco merchandise. Sin tax reform advocates have criticized the Mandanas and Singson bills for their weak provisions such as the absence of inflation indexation and the retention of multi-tiered tax rates.
The substitute bill from Singson’s sub-committee contains a minuscule increase in tax rates across the same cumbersome multi-tiered classification system. Neither does it account for future inflationary adjustments.
The substitute bill thus merely resuscitates the tired features of the Mandanas and Singson bills. Moreover, it glaringly omits any tax rate increase for distilled spirits.
The ten signing congresspersons, including Rep. Singson, Rep. Mitos Magsaysay of Zambales, and Rep. Rufus Rodriguez of Cagayan de Oro City, are promoting a bill that contradicts the tobacco and alcohol tax reforms found in the administration bill.
Rep. Singson’s substitute bill will not generate optimal revenues from price-inelastic goods because of the very small increases in the tax rates. It will result in foregone revenues because the multi-tiered tax rates will induce shifting of consumption from higher-taxed brands of alcohol and tobacco to the low-priced ones.
Worse, it will erode revenues over time because of the absence of inflation indexation. The Singson-proposed tax rates, an increase of 8 percent every two years, are equivalent to an average yearly increase of 3.9 percent. This is below the average annual inflation rate of 5 percent (from 2000-10).
Furthermore, the low rates, with the real value being diminished because of inflation, will not discourage consumption of alcohol and tobacco, thus failing to stem the rise of non-communicable diseases associated with smoking and drinking.
Contrary to the claim of Rep. Singson and his allies in the sub-committee that the administration bill is anti-poor for heavily taxing the poor who smoke and drink, it in fact protects the poor and the young. Reducing alcohol and smoking consumption by having high taxes is good for the poor’s health and productivity. The young and the poor –and the tax-paying public at large—bear the staggering health-care costs as well as the productivity losses arising from consumption of alcohol and tobacco.
Increased revenues from price-inelastic goods mean more spending for health, education and other essential services that will benefit the poor and their children. Improving the macroeconomy through the increased tax effort stimulates investor confidence that translates into jobs.
The economic costs from tobacco and alcohol consumption far exceed the amount of excise taxes collected from these products. For instance, the World Health Organization estimated that the economic costs of tobacco consumption ranged from USD2.86 billion (PHP 148.7 billion) to USD6.05 billion (PHP 314.38 billion) in 2003. From 2004-10, based on the data from the Department of Finance, the annual average of excise taxes collected from tobacco products averaged PHP25.94 billion. In other words, it takes close to five years for revenues collected from tobacco excise taxes to compensate for the economic costs (conservative estimate) in one year associated with smoking-related diseases.
On the other hand, Singson’s substitute bill will perpetuate smoking and drinking prevalence, contributing to the continued impoverishment of the young and the poor. Despite their low income, the poor spend more on smoking (2.6 percent) than on healthcare and education combined (2.5 percent), on average.
In sum, Rep. Singson’s substitute bill will thwart the administration’s health and revenue objectives. The Singson bill is backward and anti-reform. It will aggravate the Philippine fiscal problem. It will exacerbate the health problems related to tobacco and alcohol consumption.
What we need are real sin tax reforms—as expressed in the administration bill filed by Rep. Joseph Emilio Abaya.
No less than Speaker Feliciano Belmonte, Jr. has made public his position for the passage of a sin tax that is simple—not the present multi-tiered rates—and that is adjusted to inflation. In a speech he delivered on 27 July 2011, he said: “It is high time that we restructure our tobacco and alcohol excise taxes. The prevailing multi-tax rate classification of cigarette and alcohol products and the pegging of sin taxes to 1996 price levels have convoluted the tax system and shrunk the tax base, dampening the government’s revenue efforts and essentially depriving the public of resources, which could have been used to fund the most basic of services.”
We expect the House of Representatives as a whole, led by the reformers, will resist any attempt to dilute the sin tax reforms. We are confident that the reformers—whose integrity, reputation, and knowledge of the issues are unassailable—will defeat Singson’s substitute bill and secure the passage of the administration’s sin tax reforms.