Restructuring the Excise Tax on Cigarettes and Tobacco Products to Address Leakages and Enhance Revenue

There are two underlying factors for poor tax performance. First, we have many tax administration problems (e.g. tax evasion, poor re- cording and auditing by revenue agencies, and failure to computerize tax collection). Second, there are reforms in our tax structures that are long overdue – some involve raising taxes or plugging sources of leak- ages (e.g. fiscal incentives, especially tax holidays).

The newly elected Aquino administration said that it would not push any tax measure, except rationalization of fiscal incentives. But it may be forced to raise taxes, considering the expected PhP300–325 bil- lion deficit in 2010 and PhP 226 billion in 2011.4 After all, President Aquino’s flagship programs—conditional cash transfers to poor families, universal health coverage, additional year for primary education, etc.—do not come cheap.

The question then is: what to tax? In answer, this paper argues that one way of solving the deficit is by adjusting the excise tax on cigarettes and tobacco products, two of the so-called “sin products.”

There are inconsistencies in the current tax structure and tax data5 prove that these are sources of leakages. As a result, the “sin tax” has not been meeting its revenue potential.

The paper also delves into the tax’s regulatory aspect (i.e. how the tax is supposed to curb cigarette consumption) but only to explain fully the rationale behind the cigarette excise tax. This is still, in the main, a paper to identify the cigarette excise tax leakages and suggest ways of addressing them.

Read full text of “Restructuring the Excise Tax on Cigarettes and Tobacco Products to Address Leakages and Enhance Revenue.” (in .pdf, 20pp.)

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