Sta. Ana coordinates Action for Economic Reforms. This piece was published in the September 27, 2010 edition of the BusinessWorld, pages S1/4 to S1/5.

“From a societal concern, I say yes to the idea of an increase in sin taxes….As you know, these sin products have a health burden on the people.”

This was the statement of President Noynoy Aquino (P-Noy). His statement was an explicit signal to legislators to pass a law that will increase sin taxes and rectify the errors in the present law governing sin taxes.

The law on sin taxes needs to be overhauled. The sin taxes are not indexed to inflation. And the excise taxes on tobacco products especially are so convoluted, resulting in further erosion of revenues:
1. Cigarette brands registered before January 1, 1997 are taxed based on their net retail price as of October 1, 1996. This, in other words, is a price classification freeze based on 1996 prices. Prices of these old brands have more than doubled since 1996; yet the taxes they pay at present are based on 1996 net retail prices. Because of the price classification freeze, it is estimated that government’s foregone revenues would have amounted to PhP 29.4 billion in 2010 (drawn from a forthcoming paper to be published by the University of the Philippines College of Law and Health Justice).
2. Related to the price classification freeze is the complex tax structure that has four price classifications for cigarettes, namely premium, high, medium, and low. This complex structure makes tax administration difficult and leads to discrimination, misclassification and corruption.

P-Noy’s statement endorsing an increase in sin taxes has great policy significance.

First, it in a manner supplants what he said during the election campaign—that if elected President, he won’t impose new taxes. It can nevertheless be argued that the reform of the sin taxes is not actually imposing a new tax. The proposed reform corrects the major weaknesses of the law, especially aligning the tax or the price, much diminished by inflation or the price, to its real value. Recapturing the real price is not at all a new, higher tax.

Second, P-Noy argues for an increase in the sin taxes for health reasons. He is aware of the tremendous economic costs, arising from expenditures to treat smoking-related diseases and from the productivity losses. To quote P-Noy, “this health burden has a peso value.” Said another way, we should tax cigarettes not only for economic reasons (indexing to inflation and attaining revenue objectives) but also for health considerations. A significant implication of this is that the taxes on tobacco products should be higher than what can be obtained from inflation indexation. The taxes have another function—they are meant as a tool to reduce smoking consumption and smoking prevalence as well as to price the negative externalities (the spillover costs) of smoking.

Hence, increasing sin taxes yields a double dividend—1) boost tax effort, and help avert a fiscal crisis and 2) promote health in terms of reducing smoking prevalence, minimizing smoking-related diseases, and saving scores of thousands of lives. The evidence all over the world shows that hefty increases in tobacco taxes lead to both significant increases in revenues and a considerable decline in smoking prevalence.

Several bills reforming the sin tax law have been filed in Congress. What we must guard against is any attempt by the tobacco industry lobby and the legislators representing the tobacco interests from sabotaging the reforms. More importantly, the public, especially the organized citizenry—not only those who care about fiscal reforms but also those who are health advocates—should push for a law on sin taxes that pays a double dividend of meeting revenue and health objectives.

The statement of P-Noy saying “yes to the idea on an increase in sin taxes” provides the boost and momentum for the reformers to win this battle.