Fiscal boost from cigarette tax going up in smoke
By ROEL LANDINGIN, Newsbreak | 05/29/2009 6:55 PM
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Cigarettes in the Philippines are not being taxed enough, but congressmen wouldn’t hear any of it
Getting a nicotine fix is not as enjoyable as it used to be for Espiridion de la Pasion, a 56-year-old chain smoker who used to buy Hope, made by Fortune Tobacco Corp. of Lucio Tan, one of the country’s richest persons.
These days, he settles for the low-priced Fortune, another Lucio Tan product. “I just bear the taste. It’s better than have nothing to puff in my mouth,” the tricycle driver told Newsbreak in Filipino.
When the government increased excise taxes on cigarettes in 2005, pushing up Hope’s retail selling price from P20 a pack to P25, he changed brands. Fortune, although its price also increased, is still P11 cheaper than Hope.
“Not bad if they increased it to a peso per pack, but five pesos, that’s too much,” De la Pasion explained. “I’m buying two packs a day, so that’s already ten pesos.” P10 would buy his family pandesal for breakfast, he added.
Secretary Margarito Teves and his officials at the Department of Finance (DOF) had in mind the likes of De la Pasion when the agency proposed new legislation early this year to raise and restructure specific taxes on tobacco and alcohol products.
Shift to Cheaper Brands
The proposal aims not only to boost revenues, which the government badly needs to cover a growing budget deficit that will probably exceed P200 billion this year, but also to discourage smoking, especially among the young and the poor.
It appears the government is losing the campaign on both fronts. Congress is blocking the proposed amendments to the so-called sin tax law, while there has been a surge in the market share of low-priced cigarettes.
Indeed, thousands of smokers are shifting to cheaper brands in response to higher prices—a sign that the latest increase in tobacco taxes are not working as well as expected to curb smoking, especially among the poor.
The share of low-priced cigarettes sold in the Philippines surged from just over 40 percent in 2005, when the tax increases took effect, to an all-time high of about 55 percent in 2007, according to the DOF.
The share of high-priced cigarettes fell from close to 40 percent to just 30 percent. The proportion of medium-sized cigarettes sold declined slightly from 20 percent to around 18 percent.
Not Taxed Enough
The popularity and availability of cheap cigarettes worries the government because it could increase smoking among the poor, who could not afford it, and the youth.
Money for cigarettes in the poorest households is 16 times more than spending on health, 11 times more outlays for education, and twice as much for housing, according to the Tobacco and Poverty Study in the Philippines conducted by the World Health Organization, the Department of Health, and the University of the Philippines-Manila. The study also found that four out of 10 students aged 13 to 15 years old have tried smoking at least once.
To finance department officials, the consumer preference’s massive shift to cheap cigarette is a sign that the low-priced brands are not being taxed enough.
“The effective tax burden relative to retail price becomes less and less, and the tax becomes more ineffective as a tool to curb consumption,” DOF officials told the House ways and means committee in February.
A DOF study of seven cigarette brands found that while retail prices went up by an average of 89 percent between 2004 and 2008, specific taxes rose by only 31 percent during the same period.
Under-Taxed
Oddly, cigarette brands with lower prices in 2004 posted the biggest increases. One brand that sold for P8.32 per pack in 2004 was selling for P30 a pack last year—or 261 percent more four years later. However, the tax rate rose by only 99 percent from P1.12 to P2.23 in the same period.
Higher-priced cigarettes showed the same pattern. Another brand that sold for P18.77 per pack in 2004 was selling 65 percent higher, or P31 per pack, four years later. The tax, however, rose by only 21 percent from P8.96 to P10.88 a pack.
Despite several increases in excise taxes on cigarettes since the mid-1990s, the proportion of tobacco taxes to gross domestic product (GDP) has been steadily going down. It stood at only about 0.30 percent in 2008 compared to over 0.60 percent in 1997. A big jump in taxes on “sin products” in 2005 kept the ratio at about 0.40 percent for only a year. It resumed dropping in 2007 and 2008.
To be sure, declining manufacturing and consumption of cigarettes, as a proportion of GDP, is the main reason. But the DOF believes that slow upward adjustments in cigarette taxes are also to blame for the decline in the country’s tobacco-to-GDP ratio, one of the lowest in Asia.
Excise taxes on cigarettes in the Philippines make up only 38 percent of the retail selling price, compared to 40 percent in Indonesia, 43 percent in Thailand, 45 percent in Vietnam, and 65 percent in Singapore.
Uniform Rate
The extent to which cigarettes are under-taxed in the Philippines is even more evident if the country’s ratio of tobacco taxes to per capita GDP—a rough measure of average income per person—is compared to other countries with roughly the same level of development.
In the Philippines, the figure is only 0.47 percent—not even one half of 1 percent. For other countries with almost the same level of the Philippine GDP per capita, such as Maldives, India and Fiji, the ratios are 3.02 percent, 5.33 percent, and 8.04 percent, respectively.
The DOF is supporting legislative proposals at the House of Representatives, particularly House Bill 3759 authored by Quezon Rep. Danilo Suarez, and House Bill 6079 of Negros Oriental Reps. Jocelyn Limkaichong, George Arnaiz, and Pryde Henry Teves that aim to adopt a unitary tax rate for each category of tobacco and alcohol products.
For cigarettes, in particular, this means there will eventually be a single tax rate of P14 per pack instead of the current four-tier taxation system: P2.47 for low-priced brands, P7.14 for medium-priced brands, P11.43 for high-priced brands and P27.16 for premium brands.
Weaknesses in the System
DOF’s proposals aim to address the two main weaknesses of the tobacco tax system. . First, specific taxes on cigarettes—fixed amounts for each pack made by manufacturers and set by Congress some years back—have not kept up with rising tobacco prices. Second, many low-priced cigarette brands are subject to lower taxes than others, allowing their manufacturers to sell to retail them at prices that even poor smokers and the youth can well afford.
The DOF wants to be able to increase the tax rates automatically every year using the relevant price index. Presently, the tax rates are fixed and can only be changed by Congress.
Apart from taking long for the proposal to be approved, the incremental yield from recent adjustments has gone down sharply. The adjustments in 1993, for example, increased collection of tobacco and alcohol taxes by P1.48 billion that year. In contrast, the changes in 2005 increased tax collections by only P780 million.
The proposal will help government boost tax collections from tobacco and alcohol products by P19-21 billion in the first year of implementation and by as much as P60-70 billion by the fourth year, according to DOF estimates.
The proposed measure is seen as critical to the government’s efforts to boost revenues and keep the budget deficit at only P177 billion next year to assure international creditors that the Philippines’ fiscal position remains under control in the run up the presidential elections and transition to a new political administration in 2010.
Cutting Consumption
In addition, the proposal also aims to make excise taxes on tobacco and alcohol products simpler to administer. The DOF wants to correct distortions that gave advantage to some brands at the expense of others. For example, Marlboro Red and Lucky Strike Filter retail for almost the same price, but Marlboro is taxed a third less because of outdated price bracket classifications, which are based on their selling prices more than a dozen years ago.
The measures are also seen to discourage the consumption of alcohol and tobacco products, and reduce the economic costs from diseases caused by smoking and excessive intake of alcohol.
The DOF estimates that higher selling prices because of the proposed tax adjustments will cut consumption of a leading low-priced brand’s products from 2 billion packs to only 1.84 billion. The reduction by 160 million packs is equivalent to P2.5 billion in potential consumer savings.
Lesser consumption of cigarettes is also expected to help reduce the direct and indirect economic costs of diseases associated with smoking, estimated between P100 billion to P300 billion, according to the health department. It estimates that smoking-related deaths comprise around 6 to 8 percent of deaths from all causes.
Hazy Outlook
After about half a dozen hearings by the House ways and means committee between late January and early May, the prospects for the proposed bill on raising and restructuring excise taxes on tobacco and alcohol products are looking dim.
Antique Rep. Exequiel Javier, the chairman of the powerful committee that approves tax measures, is unsupportive of, if not downright hostile to, the bill.
“That’s just a prescription of the World Bank and International Fund,” he described the DOF proposal to introduce uniform taxes on tobacco and alcohol after the May 18 hearing.
He added: “I have a problem with how the proposal will hurt local industry,” especially those making low-priced brands, which will see taxes increase almost six-fold, from P2.47 per pack to P14. On the other hand, premium brands made largely by international cigarette makers will enjoy a reduction in the tax rate from P27.16 to P14.
Javier noted that the Suarez proposal could result in as much as 527 percent increase in the prices of cheap brands, from P2.23 per pack to P14.
Hoping for Miracle
Suarez is quite pessimistic the measure will be passed into law because lawmakers are now shifting their attention towards next year’s elections.
“We’re talking here of a stroke of luck or miracle,” he said of the bill’s chances of passing into law after Secretary Teves met key House leaders on May 13. “I told the chairman [of the House ways and means committee], unless the committee votes on it before the break, you can say goodbye to the bill.” He was talking about the Lenten break in April next year.
Desperate for new revenues because of the growing budget deficit, Teves is sounding just about willing to give up on restructuring the taxes on “sin” products so long as Congress pass other measures that will generate equal or more money for the government.
“In the end, it doesn’t matter whether it’s sin or black or x,” he told reporters after a meeting with Congress leaders on May 13, where some lawmaker mentioned imposing a broad spectrum fee on telecommunications firms as some sort of alternative to higher taxes on alcohol and tobacco. “Whatever formula as long as the end-result is obtained.”
The finance secretary said he agrees there’s the need to reform taxes on alcohol and tobacco not just to raise revenues but also to promote health and correct distortions in the tax structure. “I realize that, but we don’t have the luxury of time. We needed the revenue one quarter ago.” —With a report from Lilita Balane (Newsbreak)
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