By Madeiline Aloria and Joshua Uyheng
With House Bill 5636 or the Tax Reform for Acceleration and Inclusion (TRAIN) well underway at the Senate Committee on Ways and Means, it is crucial to take stock of the studied and evidence that have been presented to lawmakers, and scrutinize their relevance in light of recent developments.
This includes the two industry-commissioned studies by the University of Asia and the Pacific (UA&P), which support an adjusted schedule for the fuel excise tax and a reconsideration of the tax on sugar-sweetened beverages. Though their proposals look sound attractive, comprehensive, and economically sound on the surface, the more than 200-page pair of studies belies major gaps and biases in the analysis that threaten to weaken the most progressive provisions of TRAIN.
A SLOWER BURN FOR FUEL EXCISE?
Despite natural growth in people’s nominal income, gasoline and diesel excise taxes remain unadjusted at P4.35 and P0.00 since 1997. These unadjusted rates have resulted in about P140 billion in annual forgone revenues, and made our tax system less progressive by favoring the richest 10% of Filipino households who consume 50% of fuel in the economy. To correct this, the DoF proposes an increase of at least P6 per liter.
In TRAIN, the proposed increase is staggered to P3 in 2018, an additional P2 in 2019, and a final P1 in 2020. By the first year, about P74 billion will be generated to fund infrastructure, health, education, and social protection measures. Under this proposal, independent estimates show an increase in annual direct expenditure for gasoline, diesel, kerosene, LPG, and lubricant expenditures totaling only P76.06 for the poorest decile while increases in commuting costs will only total P39.8 — both of which will be more than covered by the proposed cash transfers worth P2,400 annually per qualified household.
In contrast, the UA&P recommends an adjusted schedule of P1.75, P2, and P2 over the same three-year period. The idea seems attractive, since by the end of three years the results seem comparable to the original proposal (P6 vs. P5.75). However, this proposal arises from the UA&P estimate using 2012 data, claiming that TRAIN will increase the fuel expenditure of the first decile annually by P1,076. This projection is questionable, given that the first decile’s annual total fuel expenditure does not even reach P500, according to the 2015 Family Income and Expenditure Survey.
Moreover, the UA&P proposal comes with very crucial caveats.
Alongside the lowered rate of P1.75 in the first year, the paper proposes that the threshold for personal income tax (PIT) exemption be lowered to P150,000, rather than the threshold agreed upon both in the House of Representatives and the Senate, which is at P250,000 year. They later on assume the feasibility of a cash transfer worth P3,600 — an amount that was only proposed to match the original DoF proposal of a P6 increase.
The first problem with the watered down fuel excise is that it isn’t viable without drastic adjustments to the other aspects of TRAIN. Lawmakers will be hard-pressed to change the PIT exemption threshold, not to mention that the cash transfers are supposed to come from 40% of the incremental revenues from the fuel tax. The P1.75 rate is nowhere near enough to fund the transfers, let alone any new government programs.
Second, as the diluted fuel excise tax increase threatens the implementation of the cash transfers program, UA&P’s proposal is poised to benefit more the rich (who has guaranteed gains from income tax cut), than the poor, making TRAIN less progressive.
A SUGAR-FREE TRAIN?House Bill 5636 also proposes a P10/liter tax on sugar-sweetened beverages (SSBs). By raising the price on SSBs, the tax aims to reduce excessive sugar intake, which has been linked to obesity and life-threatening diseases like diabetes. Revenues from the SSB tax will be earmarked for programs to prevent noncommunicable diseases, feeding programs, support for potable water, and support for alternative livelihood programs of sugar-producing regions.
In its analysis, UA&P calculates economy-wide multiplier effects for various interrelated industries, and shows the bill’s potential adverse impact on beverage sales and subsequently on direct and indirect employment. It demonstrates an appreciation for wider-scale impacts of the tax, but they do so unfairly.
First, the UA&P study claims that the gains from SSB revenues, which it estimates at about P38 billion, will be eroded to only P8 billion due to decreased VAT and CIT revenues arising from decreased sales. However, they solely account for decreased VAT and CIT from decreased beverage sales, but completely neglect households’ increased spending (perhaps on other goods) that will result from the increased disposable income all deciles will receive from the cash transfers and the PIT relief. This now increases VAT and CIT revenues from other goods.
Assuming, without conceding, the net P8 billion from SSB tax is correct, there is still clear concession on the part of UA&P that the government revenues stand to be much bigger than current estimates already stand.
Note that based on the country’s experience, excise tax is among the most efficient tax to administer, with 95% of the target collections met on the average. While the UA&P wrongly presents a tug-of-war among the three, in the lens of equity and revenue generation, introducing excise tax is a complement to VAT and CIT given the fact that they result in collections equivalent to only 40 to 50% of their supposed amounts, respectively.
Second, the UA&P study uses the notion of multiplier effects as an economic strawman, portending crippling losses to the economy due to impact on industries, but conveniently ignoring the potential welfare investments from additional government financing for education, health, infrastructure, and social protection. Not to mention it will benefit businesses that often complain of the complexities in the tax system, an issue that tops the list of deterrents to business growth in the country. In short, the study only pretends to be comprehensive but only to the extent of shoring up certain interests.
Finally, the UA&P study totally forgets the provision’s health impacts.
As former Secretaries of Health and numerous medical associations have pointed out, the SSB tax will have direct effects like reduced sugar consumption to curb obesity and reduce top noncommunicable diseases like diabetes, as well as indirect effects like funding nutrition programs to help the undernourished.
Excessive sugar intake also has economic impacts in terms of health costs, productivity costs, and plunging vulnerable families into poverty. Alleviating these will have their own multiplier effects that benefit all, especially the poor and near poor.
ROUNDING THE FINAL STRETCHAs TRAIN enters its last few sessions with the Senate Committee on Ways and Means, it is important to focus the discussions where they matter most in light of ever-evolving evidence.
For the fuel excise, by keeping the current proposal’s P3 increase in the first year, lawmakers will be able to keep both the PIT exemption and a cash transfer of P2,400 for the poorest 50% of households, all while generating substantial revenue for public transportation, universal health care, and other programs in the pipeline. What matters is whether they will receive the promised income tax relief and cash transfer, which will more than offset inflationary impacts. This is achieved in the P3 case, not the P1.75 case.
As for the SSB tax, by considering a big picture that seriously accounts for its health impacts and complementary measures, a sweet spot may certainly be found. The dichotomy the UA&P study draws between health and the economy is a specious one: first, because health itself is a precondition for a growing and equitable economy, and second, because their economic calculations themselves are incomplete and hence biased.
For a truly progressive tax reform, the evidence on the table must be rigorous, comprehensive, and up-to-date. More importantly, they must approach the tax reform objectively, with the people’s welfare in mind. As TRAIN rounds its final stretch, it cannot risk compromising its key features based on arguments well past their prime; the TRAIN has already left that station.
Madeiline Aloria and Joshua Uyheng are researchers of Action for Economic Reforms