Tobacco sin tax backfires
In 2012, the 15th Congress passed the Sin Tax Reform Law to enhance government’s revenue raising measures. Among its numerous provisions was to gradually increase excise taxes for packed cigarettes from a two-tiered system of R12 per pack for low-cost brands and R25 for premium brands in 2013 to a unified rate of P30 per pack, regardless of type, by 2017.
The passage of the law was meant to achieve the dual purpose of discouraging Filipinos from smoking whilst raising funds to finance government’s universal healthcare program.
Unfortunately, the tax scheme backfired in terms of revenue shortfalls and its impact on our tobacco farmers.
See, the successive prices increase of cigarettes, resulting from steadily escalating excise taxes, caused the lower income sector to either decrease their consumption or kick the habit altogether. This translated to a corresponding drop in tax revenues. From an estimated R90 billion in excise tax collection in 2015, government collected approximately R85 billion last year, a 5 percent decline.
While government succeeded to cull the number of smokers among the populace, it has only done so among the lower income groups. Records show that demand for premium tobacco brands, the preferred varieties of the rich, have not changed regardless of price increases.
Approximately 4.6 billion packs of cigarettes are sold every year. Interestingly 71 percent or 3.3 billion packs are attributed to low cost brands like Mighty, Champion and only 1.1 billion are attributed to the likes of Marlboro and Philip Morris.
Low-cost brands use whole tobacco leaves purchased from local farmers. In contrast, premium brands use a mix of imported tobacco and only choice parts of locally grown ones. Hence, the drop in sales of low cost brands adversely affects the livelihood of our Ilocos and Cordillera-based farmers. They are feeling the pinch as demand for their producehave taken a plunge over the last four years.
This year, our farmers face another blow as government effecteda unified tax rate of R30 per pack, regardless of cigarette classification. The move levies an additional R5 in taxes for lowcost brands and only R1 more for premium brands.
A steep drop in demand for low-cost cigarettes is anticipated. Those bearing the brunt of this are the low cost cigarette manufacturers, who, incidentally, are all Filipino companies, not multinationals; the tobacco farmers; and the government by virtue of lower excise tax collections.
The unified excise tax system is causing more damage than good. A better solution is to revert to a two tiered excise tax system where low-cost brands are taxed less and premium brands are taxed more.
This way, the burden of taxation is borne by those that can afford it; it cushions the impact on our farmers; both the lower and higher income sector are discouraged from smoking by equitably “penalizing” them for maintaining the bad habit; savings is realized from less tobacco imports; government can potentially recoup lost revenues by imposing marginally greater excise taxes on premium brands. A two tiered system is a win-win solution.
**** Andrew is an economist, political analyst, and businessman. He is a 20-year veteran in the hospitality and tourism industry. For comments and reactions, e-mail andrew_rs6@yahoo.com. More of his business updates are available via his Facebook page (Andrew J. Masigan). Follow Andrew on Twitter @ aj_masigan.