Sta. Ana coordinates Action for Economic Reforms. This piece was published in the August 16, 2010 edition of the BusinessWorld, pages S1/4 to S1/5.

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.”

We commend Mr. Lacierda for expressing brave, honest words.

Applying the VAT on expressway tolls remains a legal controversy, as those opposed to it invoke an old law that exempts such expressways from the VAT. But the Bureau of Internal Revenue (BIR) has issued a ruling on the basis of the law, passed in 2005, that expands the coverage of VAT.

The expanded VAT includes the “sale or exchange of services,” for entities whose gross sales or receipts have exceeded PHP1.5 million in the past twelve months. All kinds of services for a fee, remuneration or consideration are subject to VAT. Some transactions are VAT-exempt, but expressway tolls are not on the list of exempted transactions. In fact, the law says that sale or exchange of services subject to VAT includes “franchise grantees of electric utilities telephone and telegraph, radio and/or television broadcasting and all other franchise grantees” (italics supplied).

In other words, the government has a strong legal basis to implement the collection of VAT on expressway tolls. The problem was that the Gloria Arroyo administration did not implement the law, just one of the many violations it committed to exploit populism and prevent the further slide of an illegitimate, unpopular regime.

During the Arroyo administration, the BIR issued revenue memorandum circulars (RMCs) that ordered the VAT collection on expressway tolls. RMC No. 52-2005, dated 28 September 2005, was specifically devoted to the VAT liability of the “Tollway Industry.” On several occasions, the BIR demanded that the Toll Regulatory Board (TRB), which was then headed by the Transportation and Communications Secretary Leandro Mendoza, implement the VAT collection. Mr. Mendoza, a known agent of Mrs. Arroyo and a politicized TRB, ignored the BIR. This is but one example of the numerous revene-eroding measures that Mrs. Arroyo allowed during her term. Worse, this was done in contempt of the law.

And so, it is correct for the P-Noy administration to exert its political will in pushing for the immediate collection of the VAT on expressway tolls.

Political capital, of which the P-Noy administration has a lot, must be used judiciously. Political capital is scarce and variable. Even a popular president can lose political capital in an instant.

We can learn from the experience of US President Barack Obama—unfortunately, a negative lesson. Mr. Obama had tremendous political goodwill when he was installed as US President. He did use the popular support and huge political capital he had to carry out critical reforms on universal health care, public spending, financial regulation, and US relations with the international community. But here’s the rub: the huge political capital he amassed was dissipated, but the reforms he undertook in some areas like the economy and finance were incomplete, tepid, or compromised. Now, Obama’s satisfaction rating has declined, and his party faces the risk of losing the mid-term elections, all the more making difficult to consolidate the reforms he promised.

We hope the P-Noy administration will take note of this lesson. The message we wish to convey is this: Even as P-Noy uses political capital and risks losing public opinion to push for the VAT collection on expressway tolls, he should seize the opportunity to convince the people to support his efforts to substantially increase revenues that will finance development.

We should not lose sight of the bigger problem. That is, the country is suffering from a low tax effort (amount of taxes as a percentage of GDP), which if not addressed would translate into a fiscal crisis. In 2009, tax effort fell below 13 percent. The VAT collected from the road tolls will of course contribute to the over-all effort to increase tax effort to a secure level, say 17 percent of GDP. But that will be insufficient.

The P-Noy administration is serious about improving tax efficiency, as shown by its highly visible campaign to go after tax evaders. The substantial gains from tax efficiency will emerge in the medium term, and the expected boost in terms of tax effort is equivalent to less than 1.5 percent of GDP. The P-Noy administration is also committed to the rationalization of fiscal incentives, which translates into an increase of one percent in tax effort.

All told, the tax collected from expressway tolls, the tax administration reforms, and the rationalization of fiscal incentives will still fall short of the tax level that is necessary to avert a fiscal crisis. These taxes are needed to finance infrastructure, health, and education and other essential services, which have deteriorated through the years because of under-spending.

It is urgent for the P-Noy administration to put in place other tax policy reforms. What matters is the passage of all reform elements. An incomplete reform agenda will not serve the administration’s medium-term development plan.

What then can be done? The reform of the excise tax on sin products can yield substantial revenues; approximately PHP20 billion can be collected in the first year of its implementation. A progressive, pro-environment petroleum tax can increase tax effort that is equivalent to 0.8 percent of GDP.

In short, as P-Noy is ready to expend political capital in relation to the VAT on expressway tolls, he should take advantage of this opportunity to rally the public behind the reform of the excise taxes on alcohol, tobacco, and gasoline. Only then can he maximize the gains from the use of scarce political capital.