Cigarette Affordability and the Impact of Tobacco Taxation on Health and Revenue

The heavy burden of tobacco consumption and the high smoking prevalence in the Philippines should compel policy makers to put in place appropriate regulations, including legislation that will effectively curb the growth of tobacco use. Price and tax measures are undeniably effective in reducing tobacco consumption.

Increasing the tobacco price through taxation has become even more critical and urgent in light of the declining real prices of cigarettes, arising mainly from a problematic and infirm Philippine excise tax system. Said differently, reforming the excise tax policy, which includes a tax increase, is key to meeting the government’s health objectives such as reducing smoking prevalence—the Philippines having one of the highest in the world—and saving lives and resources.

The need to increase tobacco excise tax is also linked to the government’s urgent need to increase tax effort. Despite the Bureau of Internal Revenue’s (BIR’s) laudable effort to improve tax administration, tax effort has remained low. This suggests that tax policy, including the reform of sin taxes, is indispensable in meeting revenue objectives, preventing a fiscal crisis, and ensuring sustainable growth for the country.

Towards contributing to the goal of improving tobacco control policies and increasing tax effort, this paper seeks to fortify the proposed legislative reforms to increase tobacco tax in the Philippines. Specifically, this paper aims to:

a. Present a background on the burden of tobacco, smoking prevalence, cigarette price and tobacco tax revenue trends and cigarette taxation system in the Philippines.

b. Determine the affordability of tobacco in the Philippines.

c. Estimate the immediate fiscal and public health impact of proposed tobacco tax increases in the Philippines.

Using the Blecher and van Walbeek (2009) and Kan (2007) models in measuring cigarette affordability, we conclude that cigarettes have become more affordable in the Philippines over the past ten years. This suggests that the reform of tobacco tax policy must include tax increases based on inflation indexation, at the least, and beyond, to meet health targets and generate additional hefty revenues to address the fiscal binding constraint.

Based on the results of the van Walbeek (2010) tobacco tax impact model, we conclude that due to the addictive nature of tobacco consumption and the inelasticity of demand for cigarettes, increasing the excise tax not only reduces tobacco consumption but also generates additional revenues for the government. Among the various tobacco tax bills in the 15th Congress, House Bill (HB) 3465 and House Bill (HB) 3489 are the most comprehensive in terms of reaching both health and revenue goals. Increasing the excise tax by 215 percent will increase the average cigarette price by 73 percent, reduce smoking prevalence to at least 27 percent, generate at least PHP26 billion additional excise tax revenues and save at least 310,000 lives.

We identify three major problems with the current Philippine tobacco tax system that have rendered the tobacco tax ineffective in both reducing tobacco consumption and improving tax effort in the Philippines. Hence, on policy recommendations, we highlight the essential features of the needed tobacco tax reforms, namely, removal of the price classification freeze, a shift from the multi-tiered to the unitary tax system, and indexation of the specific tax to inflation. Further, the increase in tax rates will be unavoidably steep to correct weaknesses in the existing law and to address health objectives, including the Philippine government’s commitment to meet WHO targets, and the revenue goal of substantially raising the Philippines’ tax effort in the medium term.

Read full text of “Cigarette Affordability and the Impact of Tobacco Taxation on Health and Revenue”.  (in .pdf, 44 pp.).

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