LOW CIGARETTE TAXES A HEALTH HAZARD
The Philippine Star
08/16/10

As the government seems dead set on raising taxes on cigarettes, an appropriate question that needs to be answered correctly is how it plans to raise the money.

So far, indications point to an increase in the excise tax, which in the past 10 years has been hiked quite arbitrarily by only three times (12 percent in 2000, 6 percent in 2007, and 6 percent in 2009).

Currently, the Department of Health (DOH), as lead agency in the tax hike proposal, has been batting for a 400 percent increase in the tax on cigarettes. One of the major justifications for the figure is the need to dampen cigarette consumption among the youth, and to somehow mitigate the health cost arising from cigarette use.

Studies in other countries have consistently shown that a 10 percent increase in cigarette prices can discourage as much as 7 percent of the youth demand. Ultimately, this is seen to lead to a 4 percent reduction in overall consumption.

On the other hand, government has been collecting taxes from cigarettes at just one tenth of the estimated cost of diseases attributable to smoking. In 2006, a study showed that taxes collected from cigarette sales was only P29 billion, and yet the resulting health care toll was about ten times more expensive.

The other side

While the DOH may have every reason to side with the issue of public health costs as justification to hike cigarette taxes, there are other facets of the issue that need to be looked at.

According to oppositors of the DOH proposal, a 400 percent hike in taxes could spell the immediate death of farmers and their families, majority of them coming from the Ilocos region who have been dependent on revenues from tobacco farming. This, however, can be mitigated by encouraging farmers to cultivate other productive crops and by assisting them in pushing their remaining tobacco produce to the export market.

The bigger issue, however, would be about not getting the expected increased tax take since the proposed 400 percent levy would lead to a drastically reduced consumption, and correspondingly, lower tax collection given the current structure governing tobacco taxes.

For a new government burdened by a P300 billion shortfall in revenue collection, any move that would result in further bringing down tax incomes would be frowned on, even if there is a strong health argument.

Faulty excise system

The answer may not necessarily be a drastic increase in cigarette tax rate. It could be the revamp of an existing faulty tax system.

At present, the existing excise tax system is not operating to full potential, and as a result, excise income is much lower than what it could collect for the government. The primary reason for this comes from special exemptions on excise reclassification of brands that were in the market before 1997.

For example, even if Marlboro is selling at a higher price than brands like Mild Seven and West, it belongs to a lower category for tax purposes. Based on present system, since the Malboro brand has been in the market before 1997, it may not be moved to a higher tax classification even if the brand is now selling at higher price compared to similar types of brand category.

The current tobacco tax system is also prone to arbitrary rules. The timing of raising excise taxes is dependent on a lot of factors, in the same way that the determined amount for every tax hike is. For example, by large, past excise tax increases have failed to match inflation.

Revamp structure

Studies have shown that the reform of the current tobacco tax structure could immediately result in at least a 100 percent hike in cigarette excise income without unduly rocking the demand side and causing undue reductions in tax income.

A revamp of the current tobacco tax structure would include the deletion of the prohibition to upwardly or downwardly reclassify brands, and to classify all brands on their current net retail price and without favoring special exemptions to brands that were in the market before 1997.

Excise tax increases should be linked to an index, such as the CPI, to ensure that levies are in line with inflation. This will also ensure that revenue collections will continue to be substantial and perennially increasing, therefore correspondingly responding to the growing budget.

Simplify system

In optimizing the current tax system, it would be best to simplify the current four-tier system that categorizes cigarettes as low, mid, high or premium priced. A single tier system would be best, and is also recommended by the World Bank.

The single specific tax system would levy the same tax on all manufacturers regardless of their selling price. This is simpler to administer from the Bureau of Internal Revenue’s point of view, and will easily provide an estimate of expected revenues against which actual collections may be compared.

So as not to cause abrupt changes in the market structure, an interim two-tier phase could be implemented for two to five years. The two-tier system could effectively give distinction to local brands (mostly priced at low to mid levels) and international brands (priced at high and premium levels).

Favored local manufacturers and smokers enjoy lowest tax

The Philippine cigarette industry is the 12th largest in the world with an annual volume of around 85 billion sticks. This is so because the Philippines has one of the cheapest cigarettes among developing countries, more so if compared to developed economies. And the reason for this is the current excise system which clearly benefits specially favored cigarette manufacturers and smokers to the detriment of a revenue strapped government.

The government’s tax income from cigarette sales as a percentage of total government revenues is at a low 3.7 percent, while other countries like Indonesia and China are collecting as much as 8 percent.

In our search for additional income for the government as well as reduced health care costs resulting from cigarette use, let us not look too far beyond. What is needed is the political will and the guts to resist the well-financed cigarette manufacturers’ lobby and revamp the current skewed cigarette tax system.

Invitation for collegiate basketball fans

Students and collegiate basketball fans are invited to join the three ongoing surveys being conducted by the Philippine Collegiate Champions League (PCCL) thru the official website, www.collegiatechampionsleague.net. Survey ends on September 3, 2010.

Visit www.CollegiateChampionsLeague.net for more details about the 2010 Philippine Collegiate Championship games. 

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net