Saturday, October 18, 2008

Rationalizing Sin Taxes

Sin taxes (or excise taxes on tobacco and alcohol products) are once again in the limelight, as the government is looking for ways to increase its revenues.

Malaya reports that Senator Francis Escudero said that "additional taxes on cigarettes and liquor products is not the correct approach to weather the financial fallout in the United States."

On the other hand, Manila Standard Today reports that Health Secretary Francisco Duque hopes that the increase in cigarette taxes would make cigarettes so expensive that the poor can’t afford to buy them.

I'll take the middle road.

Secretary Duque's wish will most likely fizzle, given the fact that the government is bent on increasing public coffers, not protecting public health. In the House deliberations (dated October 27, 2004) for the Excise Tax Law of 2004 (R.A. 9334), Rep. Teddy Locsin revealed the obvious: "The government - The Philippine Government - is not famous for taking care of the health needs of their people." He added that for all intents and purposes, "the sin taxes bill, along with other revenue measures, are intended to raise revenue to narrow the fiscal gap." In other words, any increase in sin tax will not be so prohibitive as to turn away cigarette/liquor patrons. It will be pegged at the optimum amount where the higest possible tax revenue can be achieved.

I don't agree with Senator Escudero's opposition to the amendment of the excise tax, but for different reasons. I don't mind amending the current excise tax law, as long as it is for the purpose of rationalizing the prevailing tax rates and tax base of cigarette and liquor products. The current law breeds inequality among new and old cigarette and liquor brands, and it is time to amend the law now in order to achieve uniformity in taxation.

R.A. 9334 has provisions that unnecessarily favor existing tobacco and alcohol brands over new brands (possibly due to the lobbying of you-know-who). One such provision reads, "The classification of each brand of cigarettes based on its average net retail price as of Oct. 1, 1996, as set forth in Annex D, shall remain in force until revised by Congress." This seemingly neutral provision has a major implication. It has given unfair competitive advantage to the brands already existing as of 1996 (i.e. those listed in Annex D) over those introduced after that year, because the latter pay sin taxes based on their current net retail prices, while the former pay taxes based on their net retail prices in 1996.

Still sounds Greek? Let me give an example:

Brand X, a new cigarette brand, has a retail price of P19 per pack (before excise tax). Accordingly, it is taxed P26.06 as set in the law. The total price would then be P45.06 per pack after tax.

Winston Lights, an old brand, has the same current retail price of P19 per pack. But its retail price as set in Annex D is pegged at P5.44 per pack. In other words, the P5.44 figure is set in stone, whether Winston Lights' price increases in the future or not. And since the retail price is pegged at P5.44, the tax rate is also pegged at P5.85. The total price per pack: P24.85 (compare with Brand X's P45,06).

As you can see, Brand X is taxed P21 more than Winston Lights (even though they are essentially of the same retail price, kind and quality) only bcause Winston Lights is included in Annex D. That P21 (multiplied by how many Winston Lights packs are sold) should have gone to the government if only there is no distinction between new and old brands.

By the simple act of deleting the unfair provisions, the law will hit two birds with one stone: it will create a level playing field for cigarette and liquor manufacturers and it will effectively result in more government revenues.

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