Last week, Representatives Victor Ortega (1st District La Union) and Eric Singson (2nd District Ilocos Sur) defended tobacco interests, arguing that there is no need to correct the excise tax on tobacco and cigarettes. They repeated the call earlier made by Phillip Nelson, President of Philip Morris and Fortune Tobacco Corp. This if-ain’t-broke-don’t-fix-it argument is wrong. The system is really in shambles: the rates are not keeping up with inflation; some brands are still taxed based on their 1996 prices; and we have a complicated four-rate tax structure.
Singson argued that change is uncalled for “since the tobacco industry has been exceeding collection targets set by the government.” He said that in 2009, excise tax collections from tobacco hit P24.230 billion. He also touted the P2.84 billion collected in September 2010, which was above the BIR target.
Cherry-picked collection data – whether of a particular month or even a particular year – fail to provide a complete picture of the overall performance of the tax. Also, what matters is not the absolute amount of excise taxes collected but the proportion of the tax to output.
Note that despite the passage of Republic Act (RA) 9334 (Sin Tax Law of 2004), the tobacco excise tax effort (i.e. excise tax as percentage of GDP) has gone south from 0.47% in 2004 to 0.32% in 2009. Based on the latest statistics, 2010 may be no better. There may be an increase in the amount of revenue collected but the tobacco excise tax effort is still going down; for the 1st half of 2010 it is only 0.24% compared to the 0.30% recorded during the same period in 2009. The tobacco excise tax collection as a share of total tax revenues has also fallen – from 3.86% in 2004 to 2.47% in 2009. Contrary to what the two members of Congress said, the cigarette excise tax needs serious fixing.
Index to inflation
First, we need to index the excise tax rate to inflation, i.e. adjust the rate annually to reflect the impact of inflation in the previous year. The falling excise tax effort mentioned earlier shows that the excise tax is not keeping up with inflation.
Under RA 9334, the tax rates are only adjusted every two years to amounts fixed in the legislation. Adjustments were made in 2005, 2007 and 2009 with the last one scheduled in 2011. But statistics from the BIR show us during the years when that tax rate went up, tax collection grew at a very small pace or even declined! In 2005, excise tax collection grew by a mere 2.78% while tax collection declined by 13.4% in 2007 and 12% in 2009.
The finance department believes that this is due to the tax avoidance practice of “frontloading” by cigarette manufacturers. Note that the excise tax rate is imposed upon removal from factories not upon sale to consumers. Thus, the companies can avoid paying higher tax by beefing up production and releasing the finished products in the years prior to the imposition of higher tax rates (i.e. 2006, 2008). In accordance with such trend, expect an increase in the excise tax collection in 2010 since there will be a rate adjustment in 2011. In other words, the tax increase in September 2010 that Representative Singson highlighted is actually a sign of a malady in the tax structure; it is part of the continuing trend of tax avoidance. Indexing the rate to inflation will help address this tax avoidance problem.
Shift to a single tax rate
We must also recognize that the excise tax has an important health dimension. It is also intended to regulate smoking that is costing the country about P148.47 to 314.38 billion in health care costs and productivity losses. To make sure that the tax can minimize smoking, a second major reform is needed, i.e. a shift from the 4-tier tax structure to a single rate structure.
Under the current law, cigarettes are classified into 4 price brackets. By 2011, the tax rates will range from PhP2.72 per pack (lowest priced bracket) to PhP28.30 per pack (most expensive bracket).
Obviously, the tax structure favors the cheaper brands. Thus, if we merely increase the tax rates, while maintaining a multi-tier tax rate system, consumers will merely shift to lower-priced brands. It is possible that such a shift may actually increase overall consumption of tobacco cigarettes; thereby negating the regulatory goals of the excise tax.
There should only be a single tax rate, regardless of the price of cigarettes. The shift to a single tax rate will especially discourage our elementary and high school students from smoking. Most of them can only afford the cheaper brands, since they only get money from their baon (daily allowance).
Remove the tax base freeze
Finally, it is perplexing why we continue to tax certain cigarette products based on their prices more than a decade ago.
Under RA 9334, most of the popular brands today are classified into one of the 4 tax brackets based on their net retail prices as of 1 October 1996 set forth in Annex “D” of the Tax Code. These brands have undergone significant price increases over time but we continue to favor them with low taxes.
We need to remove this legislative tax base freeze by repealing Annex D of the Tax Code.
Restructuring the excise tax: a double win for the country
There are several bills pending in Congress, which are pushing for true reforms in the excise tax. These include House Bill (HB) 3465 (filed by Rep. Henedina Abad), HB 3489 (Rep. Neil Tupas) and HB 2687 (Reps. Jocelyn S. Limkaichong, George Arnaiz, Pryde Henry Teves). In our view, the bill filed by Rep. Abad is the superior bill, but we urge Congress to consider the similar features of the three bills that would strengthen excise tax collection.
As Representative Abad said, “Reforming the excise tax is a double win for the country. First, it will help lower the country’s smoking prevalence rate, save lives, and discourage our children from lighting their first cigarette. At the same time, studies show that these reforms, contrary to common speculation, will bring in more revenues. Government can use these to plug the deficit and pay for universal health care coverage and health promotion programs.”