By AJ Montesa
The 1st Regular Session of the 19th Congress of the Philippines is now full of activity. Since the President made his administration’s policy priorities clear two and a half months ago, legislators have filed a total 4,587 House Bills (HB) and 1,250 Senate Bills (SB) as of this writing.
Budget deliberations are also underway. The National Expenditure Program for FY (fiscal year) 2023 proposes a total budget worth P5.268 trillion, with P3.002 trillion allocated as new appropriations for Departments and Agencies and P1.257 trillion as Special Purpose Funds.
While the national budget reflects President Ferdinand Marcos, Jr.’s spending priorities, the administration’s resource consolidation plan represents the strategy to raise the funds to support these spending priorities. DBM Secretary Diokno has emphasized the importance of improving tax administration, while also pursuing pending reforms left over from the previous administration.
Rep. Joey Salceda, the Chair of the House Committee on Ways and Means (CWM), has been quite efficient in conducting hearings on proposed tax reform measures. The CWM has already produced four Committee Reports: HB 4102 imposing an excise tax on plastic bags; HB 4122 imposing VAT on digital transactions; HB 4125 or The Ease of Paying Taxes Act; and HB 4339 also known as Package 4.
Some pending major tax reforms are Mining Fiscal Regime Reforms, Real Property Valuation Reform (Package 3), Motor Vehicle Users’ Charge (MVUC) Reform, Value-Added Tax (VAT) Reforms, and Gaming Excise Taxes. Altogether these reforms will help plug the current fiscal gaps: an outstanding debt worth P13.2 trillion or 64.1% of GDP and a deficit over of -2.6% of GDP.
While the administration has signaled these reforms as priorities, one could argue that an underrated set of reforms ought to be considered as a primary means to achieve the administration’s ends as well: health taxes. According to the World Health Organization (WHO), health taxes such as excise taxes on tobacco, alcohol, and sugar-sweetened beverages represent a win-win policy in that they effectively raise revenue for the government while also improving the welfare of society by lowering the consumption of products with negative health externalities.
There is currently only one House Bill that represents a health tax: Chair Salceda’s HB 1810 which would effectively increase the excise tax on pre-mixed alcoholic beverages (a.k.a. alcopops) by re-classifying them as “fermented liquors.” At present, alcopops are classified as “distilled spirits,” which have an ad valorem rate of 22% and a specific rate of P52 per proof liter. Meanwhile, fermented liquors have a specific tax rate of P39 per liter. (Note the difference in units: proof liters vs. liters.)
Why the need to increase the rates on alcopops? Pre-mixed drinks such as Tanduay Ice Alcomix and Tanduay Ice Vodka Lemonade are more likely to be considered by consumers as alternatives or substitutes to beer rather than other distilled spirit products such as rums and gins. Alcopops are packaged similarly to a bottle of San Miguel Light or Pale Pilsen — in 320-330ml bottles with alcohol content of about 4% to 6%. In the Philippines, beer and alcopops have similar levels of alcohol content.
Another concern over the current lower rate for alcopops is their being more attractive to the underaged, especially girls, because of their pleasant flavors and resemblance to soda. The lower tax rate makes alcopops more affordable to the youth.
Distilled spirits have an effective tax rate well below fermented liquors. When standardized as excise tax per unit of pure alcohol, the effective tax of distilled spirits ranges from just one-fifth to one-half the effective rate of fermented liquors. Alcopops are priced significantly lower compared to their substitutes — just around half the rate at which beers are taxed. I provide an example summarizing prices and effective tax rates in the table provided.
This existing loophole may seem small, but we must realize that the price arbitrage necessarily undermines the principle of the past Sin Tax Reforms we have secured thus far. If consumers can opt for cheaper alternatives due to an imbalanced tax structure, then we fail to completely address the negative externalities and health burdens posed by alcohol over-consumption.
Still on the tax rate differentiation, the lower effective tax rates for some distilled spirits compared to beer may require a review. From a health perspective, distilled spirits, because of their much higher alcohol content, are more harmful.
Rep. Salceda’s proposal is a solid starting point, and it should push the Executive and Congress to seriously consider the possibility of further increasing the rates on alcohol products as a tool to raise even more revenues as well as to promote health.
AJ Montesa is a policy researcher and analyst and heads the tax policy team of Action for Economic Reforms.