are sin taxes sinful? - action for economic reforms...in 2004, the united states surgeon general...

February 2012

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

Laurence Anthony Go Researcher, Action for Economic Reforms

Sin Tax Reforms

Unitary Transform the sin taxes to a higher and single rate.

Specific To simplify collection, products will be taxed per unit or quantity.

Index to Inflation

Avoid revenue erosion by making the tax adjust automatically to inflation

Remove Price

Freeze

Stop price privileges and provide a level playing field for all companies

Earmark Allocate funds for universal health care and tobacco farmers

Action for Economic Reforms Unit 1403 West Trade Center

132 West Avenue, Quezon City, PH [email protected]

Why Sin Taxes are Good The year 2011 did not bode well for the Philippines. Growth was sluggish as a result of underspending. The government now needs to pump prime the economy, which requires more revenue sources other than plugging the leaks. An attractive proposal is the tax hike for sin taxes on tobacco and alcohol. Given the very low rate and flawed structure of sin taxes, it is imperative for the government to review its policy especially with its current situation Cost-benefit analysis shows that revamping the current system is more beneficial to society in the following respects: increased tax revenues, decreased consumption of sin goods and earmarking of funds for the universal healthcare program. Therefore, the policy recommendation is to adopt a higher yet uniform specific tax rate with indexation to inflation and removal of the price classification freeze. Despite possible objections and drawbacks, there are policy features that can address these issues. In summary, this policy paper aims to illustrate the necessity of reforming the sin tax system in the Philippines, for the economic survival and future growth of the country. Indeed, taxing sin is no sin at all.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes February 2012

INTRODUCTION AND SCOPE

Under the Arroyo regime, the government suffered nine years of budget deficit. Starting 2001, Arroyo assumed a budget gap of 147 billion pesos. Midway through her second term, Arroyo was almost able to achieve a balancing of the budget. This did not last, however, as the near-end of her term saw the largest deficit in 14 years as well as a crippled Aquino government inheriting 197 billion pesos of deficit only six months into the year. Nonetheless, 2010 ended with lower-than-expected deficit at 314 billion pesos. In 2011, under the Aquino administration, the budget deficit took a turnaround as the January to November figure decreased to only 96 billion pesos. Does this call for a celebration?

Not if we consider the growth rates during the same period. While the 314 billion deficit brought about the “honeymoon growth” rate of 7.6 percent in 2010, it was followed by a more than lackluster growth rate of 3.7 percent for 2011. Except for 2007 (which was an election year), all the other years either had a combination of low-modest growth and small, sustainable deficits or high growth and excessive deficits.


Given these figures, one might ask: are we in a no-win situation? That is, are strong growth and sustainable government deficits simultaneously unachievable? In order to answer these questions, we must first understand how budget deficits arise. There exist two principal reasons behind any budget deficit. On the one hand, too little taxes and other revenues were collected; while on the other, expenditures augmented as a result of aggressive government spending. It is a well-known fact in economics that government spending leads to higher economic growth; however, even spending cannot be used excessively to drive growth. Overspending may cause unsustainable levels of deficit—which can prove to be counterproductive for growth. How then can we spend and grow without the danger of incurring unduly high deficits? We can increase revenues via taxes so that the government has room to spend more and grow faster.

Taxes are an example of the phrase “easier said than done.” Although imposing new taxes makes

economic sense, it can prove otherwise in the political arena. Most of the time, taxes are politically unpopular since these impose a burden on the general populace. Hence, politicians often avoid supporting such revenue-generating bills especially if there are upcoming elections.

Once again, we find ourselves facing another no-win situation. If taxes are the solution and yet

problematic because they are mostly politically infeasible, what then must be done? Perhaps we can take comfort in the fact that imposing taxes is not always unpopular. Some taxes are more popular to the general public—such as the topic of this paper: sin taxes.

This paper begins with a discussion of the Philippines in terms of its health-related statistics as well as

the current overall tax structure. Afterwards, it will tackle the economic rationale of imposing sin taxes in addition to the health dimension of such taxes. The sin tax system will also be explained and its relation to other countries in the region. A comparison of benefits and costs will be made and from there, policy suggestions will be presented.

PHILIPPINES: IN SICKNESS AND IN HEALTH Smoking and drinking are first and foremost health-related activities. The case for levying taxes on these behaviors relies heavily on scientific studies showing the negative effects of such actions to one’s health.

Data from the World Health Organization (WHO) show that in the world, tobacco, the second major cause of death, is also the “single biggest preventable cause of death.” In addition, smoking is “responsible for the death of one in ten adults worldwide.” More alarming is the fact that “half the people that smoke today—that is about 650 million people—will eventually be killed by tobacco.”

In the Philippines, Department of Health (DOH) estimates show that about 87,000 Filipinos die every year due to tobacco-related diseases. In addition, DOH Secretary Enrique Ona asserts that “secondhand smoke causes a wide range of immediate and long-term adverse health effects, including cancer, serious respiratory diseases, and cardiovascular diseases.”

The Philippines at present enjoys the dubious distinction of having one of the highest smoking prevalence rates in the world, ranking ninth in adult male smoking population and sixteenth in adult female smoking population. The latest Global Adult Tobacco Survey (GATS) estimates that 17.3 million Filipinos aged 15 years and over smoke or a prevalence rate of 28.3 percent.


TABLE 1: GATS RESULTS, 2009 Adult Tobacco Smokers Overall (%) Male (%) Female (%) Current Tobacco Smokers 28.3 47.7 9.0 Daily Tobacco Smokers 22.6 38.2 6.9 Current Manufactured Cigarette Smokers 27.0 46.6 7.5 Current Hand-rolled Cigarette Smokers 1.9 2.3 1.6 Current Smokeless Tobacco Users 2.0 2.8 1.2 Daily Smokeless Tobacco Users 1.4 1.8 1.0

Source: 2009 Global Adult Tobacco Survey in the Philippines

Meanwhile, there is also a surge in the use of tobacco products among the youth with the 2007 Global Youth Tobacco Survey estimating about 27.3 percent of school children aged 13 to 15 years old are smokers and marking a 40 percent increase in youth smoking prevalence in a span of four years since 2003. Girls ranked second place among the world’s heaviest tobacco users while the boys ranked fourth.

TABLE 2: GYTS RESULTS, 2003 AND 2007

Youth Tobacco Smokers Overall (%) Male (%) Female (%) 2003 2007 2003 2007 2003 2007

Current Tobacco Smokers 19.6 27.3 26.5 34.4 13.0 19.6 Current Cigarette Smokers 15.0 21.7 21.8 29.3 8.8 13.8

Source: 2003 and 2007 Global Youth Tobacco Survey in the Philippines

These statistics are particularly alarming given that the global trend on tobacco use is that of declining smoking prevalence rates in developed countries, while the rate is steadily increasing in developing nations. In general, smoking prevalence in the Philippines shows an upward trend. To illustrate, adult male prevalence rate in 2003 represented a 5 percentage point increase from 2001 levels while youth smoking prevalence in 2007 represented an almost 8 percentage point increase from 2003 levels.

According to recent data from the Philippine College of Chest Physicians, 10 Filipinos are dying every hour, 240 everyday and approximately 88,000 per year because of the aforementioned tobacco-related diseases.

In 2004, the United States Surgeon General Report (USSGR) cited the epidemiological evidence linking

cigarette smoking to several cancers, cardiovascular and respiratory diseases and other medical conditions. Although at the moment there is no known cause of death directly and entirely attributable to smoking, several studies support the earlier proposition that there is sufficient evidence of tobacco smoking causality in the aforementioned diseases.

Secondhand smoke, composed of side stream smoke produced by a lit smoldering cigarette and the

mainstream smoke exhaled by the smoker, also causes several thousands of deaths among non-smokers, mostly affecting children who are more vulnerable to secondhand smoke. Components of chemical compounds in secondhand smoke, including nicotine, carbon monoxide, and tobacco-specific carcinogens, can be detected in body fluids of exposed nonsmokers. The USSGR pointed out that breathing secondhand smoke for even a short time can have immediate adverse effect on the cardiovascular system and interfere with the normal functioning of the heart, blood and vascular systems, increasing the risk of heart attacks. Secondhand smoke has been found to be the cause of a wide range of illnesses such as cancer and serious respiratory and cardiovascular diseases. Asthma attacks in children, as well as coughing, mucus build-up, difficulty in breathing and wheezing, are not uncommon to those who are exposed, though briefly, to secondhand smoke.


In the Philippines, the DOH reported that almost 60 percent of children aged 13–15 are already exposed to secondhand smoke in their own homes. In the most recent GYTS, 54.5 percent of respondents reported exposure to secondhand smoke in their home, while 64.8 percent reported exposure in public places. An overwhelming 90.9 percent of respondents, however, think that smoking should be banned in public places. Adults are also harmed by secondhand smoke. Spouses of smokers who have high secondhand smoke exposure are at high risk for lung cancer: 30 percent higher risk for husbands of smokers and 20 percent higher risk for wives of smokers.

The health perils of drinking alcohol, though perhaps less severe than smoking, have significant costs on the individual and society. Drinking alcohol brings about various economic costs and social problems: productivity losses, health care expenditures, vehicle accidents, fetal deformities, spousal and child abuse, violence, crime, accidental falls, fires, drowning and suicides. Statistics are likewise very disheartening. Based on World Health Organization (WHO) figures, 20 percent and 13 percent of male and female students, respectively, drank at least one alcoholic beverage on one or more of the past 30 days—an estimate higher than other countries in the same region. In addition, total per capita alcohol consumption from 2003–2005 was estimated to be 6.4 liters in the Philippines, again higher than the regional average.

Echoing the Euromonitor 2011 report, it is said that “Filipinos are regarded as heavy drinkers and they tend to start drinking alcohol on reaching their teens. In 2009, the Department of Health reported that 24 percent of 15-to-19-year-olds are regular drinkers.” Another issue is the legal age restriction rule which is seldom followed and enforced. Consequently, underage drinking is prevalent in the country, and minors can easily purchase alcoholic drinks due to poor monitoring. In addition, the report states that “underage drinking remained widespread due to the availability of low-priced beer, spirits and RTDs (ready-to-drinks)/high-strength premixes and ease of access of these products.” Undoubtedly, excessive alcohol consumption is one of the world’s leading health risks. The Global Status Report on Alcohol and Health from the WHO declares it to be “a causal factor in more than 60 major types of diseases and injuries and results in approximately 2.5 million deaths each year.”Summarily, 4 percent of all deaths worldwide are attributable to alcohol. Alcohol abuse, like cigarette smoking, is fatal to younger generations as it has become the world’s leading risk factor for death among males aged 15–59. The report also confirms that “alcohol consumption is estimated to cause from 20 to 50 percent of cirrhosis of the liver, epilepsy, poisonings, road traffic accidents, violence and several types of cancer.” Some of the major disease and injury categories causally linked to alcohol are the following: neuropsychiatric disorders, gastrointestinal diseases, cancer, injuries, cardiovascular diseases, fetal alcohol syndrome and pre-term birth complications and diabetes mellitus. PHILIPPINE TAX SYSTEM Fiscal policy concerns taxation as a revenue-generating capacity of the national government. Ideally, it is a viable solution to the many ills of society. However, when politics comes into play, taxation takes a back seat and is seldom thought of as the optimal way to address government problems. What does reality show? Based on the Bureau of Treasury data from year 2001–2011, tax revenues as a component of total government revenues comprise a substantial proportion, ranging from 74 to 89 percent of the entire revenue stream. There is no denying that indeed, taxes form a large part of the revenues that the national government uses as the source of budget for its programs. Knowing this fact, one can say that taxes can save the country from the larger-than-expected budget deficits.


The next question to ask is: Which tax measure must be reformed? There are four major categories of taxes: income and profit, sales and licenses, excise and others, which include residual domestic and travel taxes. Illustrated in the chart is the breakdown of tax revenues into its several groups, with income as the largest source of revenue and excise as the smallest, not considering the aggregate figure (“Others”). Drawing from this graph, excise taxes prove to be a viable source of opportunity from which the government can extract more revenue in closing the budget gap.

Inspecting the facts more closely yields a peculiar trend for the excise tax. Comparing it to the other tax classes, it is the only tax that did not experience real and significant growth from year 2000 to 2011. Income taxes experienced a more than two-fold increase, while sales and licenses tax enjoyed slightly less than 200 percent rise. Even the “Others” component, an aggregate of travel and other domestic taxes, saw a doubling in less than a decade.


Strangely (but perhaps not surprisingly), excise taxes remained constant for the years under study, and even decreased nominally. If real rates were incorporated into the equation, the decrease would be more magnified to prove that this form of taxes has been immutable and somewhat unchanged across ten years. Given all these facts, there is no doubt that change is needed and must be done at the soonest. The focal problem emerges: What changes must be applied to the current excise tax system? Before tackling this predicament, a briefer on sin taxes is necessary. WHAT ARE EXCISE AND SIN TAXES?

Excise taxes—as opposed to general taxes—are selective in coverage and discriminating in intent. According to Cnossen, most excises in practice are more easily administered than other taxes. Excise duties on tobacco and alcohol are potential revenue sources, because of high sales volume and few producers, and these make collection simple. Also, due to the presence of few substitutes, consumption and revenue remain high despite excise-induced price rises. Sumptuary in nature, sin taxes are specifically levied on certain generally socially proscribed goods, usually alcohol and tobacco. Other levied goods and services include gambling, prostitution, soda and more. The relationship between both taxes is that sin taxes pertain to excise taxes on particular “immoral” behaviors or vices as judged by the society. Governments impose this type of tax in order to discourage individuals from partaking in such activities without necessarily making them illegal. For purposes of this paper, the scope is limited to alcohol (liquor, wine and distilled spirits) and tobacco (cigar and cigarettes) products. THE RATIONALE: IS IT A SIN TO TAX SINS? Taxing sins, that is, taxing both alcoholic beverages and cigarettes has always made economic and scientific sense (though not so much politically in the Philippines). Supporters have touted imposing sin taxes as a “win-win” scenario, much like the idea behind “hitting two birds with one stone”. The first—and perhaps the more unambiguous of the two—is the health claim that sins must be punished in order for them to be avoided by sinners-to-be and stopped by the already-sinners. Smoking cigarettes and drinking alcohol have been proven scientifically and believed universally to be harmful to one’s health. Studies have, time and again, corroborated such belief. However, the second prong—that pertaining to the economic perspective—has received more contrasting (but not necessarily cogent) views. Both smoking and drinking have proven to be behaviors producing negative externalities. And in economics, negative externalities lead to less than optimal outcomes: overproduction of the goods involved (cigarettes and alcohol). Hence the need for Pigouvian taxes to limit these activities while being able to earn revenue for the government. Simply put, the rationale for taxing sin arises from its health benefitsand economic advantages. PHILIPPINE SIN TAX SYSTEM According to the 1997 Philippine tax code, excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported. The information listed on the following tables is obtained from RA 9334: An Act Increasing the Excise Tax Rates Imposed on Alcohol and Tobacco Products, Amending for the Purpose Sections 131, 141, 142, 143, 144, 145 and 288 of the National Internal Revenue Code of 1997, As Amended.Chapter III, Excise Tax on Alcohol Products, discusses tax laws on distilled spirits, wines and fermented liquor. Succeeding are tables of summarized provisions on alcohol and cigarette duties.


TABLE 3: ALCOHOL TAX CODE, 1997 AND 2004 Product 1997 Tax Code 2004 Revision Distilled Spirits

1. Produced from nipa, coconut, cassava, camote, buri palm, juice, syrup or sugar of the cane

2. If not produced from raw materials enumerated above

P8.00 per proof liter; P4.00 per proof liter if not >100 liters a day, containing not more than 50% alcohol Based on net retail price per 750ml bottle: <P250 à P75 P250-P675 à P150 >P675 à P300

P11.65 P126 P252 P504

Wine 1. Sparkling wines/champagnes

2. Still wines containing 14% alcohol

or less

3. Still wines containing 14-25% alcohol

4. Still wines >25% alcohol

Based on net retail price per bottle <P500 à P100 >P500 à P300 P12 P24 Similar to distilled spirits

P145.60 P436.80 P17.47 P34.94 Same

Fermented Liquor 1. Beer, lager beer, ale, porter and

other fermented liquors except tuba, basi, tapuy and similar domestic fermented liquors

Based on net retail price per volume liter <P14.50 à P6.15 P14.50-P22 à P9.15 >P22 à P12.15

P8.27 P12.30 P16.33

TABLE 4: TOBACCO TAX CODE, 1997 AND 2004

Product 1997 Tax Code 2004 Revision Tobacco

1. Twisted by hand or reduced into a condition for consumption other than drying and curing; Prepared with or without use of machine or instruments or not pressed; Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings; For chewing so as to be unsuitable for use in any other manner

2. If not produced from raw materials enumerated above

P0.75 per kilogram P0.60 per kilogram

P1.00 P0.79


Cigars and Cigarettes 1. Cigars

2. Cigarettes packed by hand

3. Cigarettes packed by

machine

P1.00 per cigar P0.40 per pack Based on net retail price <P5.00 à P1.00 P5.00-P6.50 à P5.00 P6.50-P10.00 à 8.00 >P10.00 à P12.00

Ad valorem Based on net retail price: <P500 à 10% >P500 à 15% P2.00 (2005), P2.23 (2007) P2.47 (2009), P2.72 (2011) (2005) (2007) (2009) (2011) P2.00, P2.23, P2.47, P2.72 P6.35, P6.74, P7.14, P7.56 P10.35, P10.88, P11.43, P12 P25, P26.06, P27.16, P28.30

After reviewing the tax code on excise taxes for alcohol and tobacco, several points merit closer attention. First, the current system is a mix of mostly specific and partly ad valorem taxation, i.e. specific for distilled spirits, wine, fermented liquor, tobacco and cigarettes and ad valorem for cigars. In addition, complexities arise as a result of the four- or multi-tier system dependent on the net retail price of the product. Also, the price from which the classifications are made is based on 1997 levels. It is important to note that the same rates are applied for both domestic and foreign products. Moreover, tax increases generally stop in the year 2011 for those with specific taxation. After the revision of the code, excise taxes are already applicable to the country’s ports and free zones. Crucial to the survival of the companies, there is a preferential treatment for brands existing as of October 1, 1996 and new brands are hindered from competing as a result of more stringent measures on price classification. Lastly, the revision is designed in a static manner such that it cannot adjust flexibly with the times. Aside from looking at its characteristics, what should warrant some examination are the results of the status quo. That is, the structure of the current tax system must also be judged based on the amount of revenues it generates for the government. The succeeding chart shows the excise tax collected from year 2001 to 2011.


After the restructured tax system was implemented, it was expected to generate incremental revenues of 22–24 billion pesos in its first year, doubling to 45–47 billion pesos on the second year and about 52–55 billion pesos for the third year. This is according to the former Secretary of FinanceMargaritoTeves, who believed at that time that imposing new excise tax laws would help the country in decreasing the budget deficit. However, this ideal scenario did not happen. The shocking truth is that in 2007, two years into the new excise tax law, sin tax collections actually fell nine percent in the first half despite higher rates. Data from the Department of Finance (DOF) showed that tobacco and alcohol taxes reached 19.8 billion pesos from January to June, which is two billion lower than the same period in the previous year. Given that the tax rates increase eight percent biannually, the prospective increase in 2007 led to the local manufacturers’ front-loading their withdrawals from warehouses to take advantage of lower rates. Apart from these, other reasons for a low sin tax collection include under-reporting of sales and data manipulation by the manufacturers. Moreover, the government, through the Bureau of Internal Revenue (BIR), was inefficient in tax collection, as evidenced by the lower actual figures versus target revenues. In summary, the following chart shows the problem in the relevant policy area, as well as reasons why current policy is inadequate in solving the main issue.

SIN TAX SYSTEM IN OTHER COUNTRIES If local producers and manufacturers of tobacco and alcohol products were given the chance to relocate to other states, they would not. The reason is that the Philippines is a conducive business environment for sin products—as evidenced by its superlatively low rate of excise taxes, the lowest in the neighboring ASEAN region. In fact, Finance Undersecretary Gil Beltran claimed that the Philippines’ sin tax rate is the lowest in the world. There is no one excise tax rate prevailing in the above-mentioned regions because it is common to discuss the structure according to two categories: alcohol and tobacco taxes. However, Beltran said that the average sin tax rate in the region is 51 percent while the country’s rate is only 28 percent. The undersecretary also added that ASEAN countries like Thailand and Vietnam are implementing rates of 80 percent and 65 percent, respectively. The table below shows the varying rates imposed upon alcohol and tobacco products in several neighboring Asian states. Moreover, below is a comparison of various excise (sin) tax systems across the ASEAN region.

Problem & Solution!

• Problem: Tax Structure not supporting Growth !• Solution: Excise Tax Law Revision of 2004 (RA 9334)!

Factors!

• Multi-tiered system (too complex to administer)!• No automatic tax rate adjustment for inflation!

Factors!

• Favors "old brands" (hard to reclassify these)!• Low rate (total excise taxes did not increase in 10 years)!• Open to abuses (gives discretion to tax authorities)!


TABLE 5: TOBACCO AND ALCOHOL TAXES IN NEIGHBORING COUNTRIES Country Tobacco Tax Alcohol Tax Singapore SGD 352/000 Beer à $3.10/liter

Wine à $9.50-70.00/liter Brandy, Whisky, Rum, Gin, Vodka à $30.00-70.00/liter

Hong Kong HKD 804 Liquor (>30% alc) à 100% Liquor (<30% alc) à 40% Wine à 80%

Malaysia MYR 120/000 + 20% of (ex-factory price + import duty)

Beer à 89 RM/ liter Wine à 112-425 RM/liter Brandy, Whisky, Rum, Gin, Vodka à 553-587 RM/liter

Indonesia Hand rolled kreteks: >2 bio; Rate 22% of banderole >0.5 - 2.0 bio; Rate 16% of banderole ≤0.5 bio; Rate 8% of banderole ≤6 bio; Rate 4% of banderole Machine made kreteks and White: >2 bio; Rate 40% of banderole >0.5 - 2 bio; Rate 36% of banderole ≤0.5 bio; Rate 26% of banderole

Wine à 170% Brandy, Whisky, Rum, Gin, Vodka à 170%

Vietnam Calculation domestic:55% of ex-factory price Calculation imports:55% of [90% of (Selling price of foreign branch office/(1 + 55%))]

Beer à 150% Wine à 150% Brandy, Whisky, Rum, Gin, Vodka à 150%

Korea RRSP/pack > 200 = KRW 32,050/000 RRSP/pack < 200 = KRW 2,000/000

Beer à 30% Wine à 15-30% Brandy, Whisky, Rum, Gin, Vodka à 15-30%

Taiwan TWD 590/000 Beer à 50% Wine à 50% Brandy, Whisky, Rum, Gin, Vodka à 50%

China CIF ≥ RMB 50/carton = 45% + RMB 3/000 CIF < RMB 50/carton = 30% + RMB 3/000

Yam-based à 20%+RMB1/kg Other alcohol à 10%

India Filter: >85 mm; Tax = INR 2,060/000 75-85 mm; Tax = INR 1,675/000 70-75 mm; Tax = INR 1,260/000 ≤70 mm; Tax = INR 780/000 Non-Filter: >60-70 mm; Tax = INR 520/000 ≤60 mm; Tax = INR 160/000 *Rates will increase 5 percent on April 1, 2007

India Made Foreign Liquor à 200% or 100.4 INR/LPA Country Liquor à 120 INR/LPA

Cambodia Local and Imported: 10% All: 10% Thailand Calculation domestic:

(Ex-factory price) x (79% / (100% - 79%)) Calculation imports: (CIF + Import Duty) x (79% / (100% - 79%))

Beer à 60% Wine à 60% Brandy, Whisky, Rum, Gin, Vodka à 60%


TABLE 6: TAX FORMS IN NEIGHBORING COUNTRIES Tax Structure AVT, Specific or Mixed Philippines Mixed Laos Single AVT Myanmar Single AVT Cambodia Varied AVT Vietnam Varied AVT Indonesia Varied AVT Singapore Single specific Malaysia Single specific (tobacco)

Mixed (alcohol) Brunei Single specific Thailand Mixed

Apart from the obvious fact that the Philippines has one of the lowest rates in the region, it must also be emphasized that different states have varying excise tax structures for diverse reasons. Within the Asia Pacific region, 19 of the 27 countries impose specific excises on cigarettes. This further corroborates the trend, over the period of 1986–2006, toward specific taxes for tobacco products. Explaining such a phenomenon is the opening up of various countries’ cigar markets to investors and competitors.

Among those countries that impose a specific tax on tobacco products, a sample of 14 states was studied, including the Philippines and its ASEAN neighbors. The previous chart illustrates the specific duty collected (in US$) per 1000 cigarettes. Needless to say, the Philippines is lagging behind in terms of the amount of tobacco tax being collected. To put it in extreme terms, its tobacco tax collection is only one percent of the cigarette tax accumulated in Singapore. BENEFITS OF SIN TAXES There are various benefits in imposing a sin tax on alcohol and tobacco products. On top of the list is revenue generation, the primary reason for implementing any tax measure. In times of budget deficit or growth slowdown, the much-needed funds can be sourced from sin taxes to pump prime the economy. The question now is how much funds can such sin taxes generate? An example of best practices in sin tax hikes is Thailand,


where the estimated accumulated revenue from sin taxes in 12 years was able to finance the construction of the Bangkok Mass Transit system. In the Philippines, these tax collections can amount to as much as 65 billion pesos per year, which can be used to construct hospitals, hire more medical officers and expand coverage of the health insurance program. Apart from this chief objective of revenue generation, sin taxes also exist to cause possible behavior modification. Studies have shown that an increase in tobacco and alcohol prices leads to decreased use of such products. In fact, taxing sin products is seen to be the most potent tobacco control policy (as against other examples like graphic health warnings, etc.). Since researchers and economists have proven price to be an effective deterrent for young and poor people, a price increase due to the tax hike will lead them to lessen consumption. Moreover, price is readily implemented and relatively well-enforced vis-à-vis other regulations that need strict monitoring from the government (e.g. minimum age requirement). In the long run, the outcome will be less government expenditure for tobacco- and alcohol-related diseases. Further strengthening this claim is the substantial healthcare expenditures spent on the four major diseases—lung cancer, heart attacks, stroke and chronic obstructive lung diseases—which amounted to Php276 billion in 2005.

Because of this, sin taxes also help in internalizing the effects of negative externalities in smoking and drinking. Common examples are the effects of secondhand smoke to bystanders and the potential dangers of drunk driving. The externality claim is intended to make the “sinners” responsible for the social effects of their private action. However, even if with stringent tax measures, the government is unable to completely deter individuals from engaging in such vices as a result of their inelastic demand, it still appears to be a win-win situation. On the one hand, the government benefits through the revenues it earns from the people. On the other, it is able to discourage socially proscribed activities (even if it may be at the expense of collecting less revenue). The win-win situation is characterized by the dual objectives of imposing a sin tax: first, the revenue goal of collecting more money for government spending (whether earmarked or not) and second, the health target of dissuading individuals, especially the young and poor, from smoking to mitigate health risks. The World Health Organization (WHO) in 1999 approximated that about 200,000 Filipino men would develop smoking-related diseases in their productive years of age. It was also estimated that the cost of providing healthcare for these sick persons, including the loss in productivity, would cost Filipino taxpayers some Php 43 billion. According to the more recent Tobacco and Poverty Study (2006), economic costs, which include health care costs and productivity losses from death and disease related to four smoking-related diseases in 2003 (lung cancer, cerebro-vascular disease, coronary artery disease and chronic obstructive pulmonary disease [COPD]), would range from US$ 2.86 to 6.05 billion or Php 148.47 314.38 billion yearly (US$1=Php 52 in 2003).

TABLE 7: SUMMARY OF ECONOMIC BURDEN FOR FOUR SMOKING-RELATED DISEASES, 2003 Method of Estimation Peto-Lopez (PhP) SAMMEC (PhP) Lung Cancer 3,955,887,312 10,519,912,468 Cerebro-Vascular Disease 49,993,712,496 180,791,465,452 Coronary Artery Disease 65,911,644,968 85,209,679,672 Chronic Obstructive Pulmonary Disease 28,607,506,096 37,863,055,984 Current Smokeless Tobacco Users 2.0 2.8 Daily Smokeless Tobacco Users 1.4 1.8

Source: Tobacco and Poverty in the Philippines


The Tobacco and Poverty Study estimated that smoking related illnesses, namely, lung cancer, cerebro-vascular diseases (CVD), coronary artery diseases (CAD) and chronic obstructive pulmonary diseases (COPD) accounted for 68 percent of total deaths and has cost us the amount of US$2.86–6.05 billion.

TABLE 8: SUMMARY OF ECONOMIC COSTS IN US$ FOR FOUR SMOKING-RELATED DISEASES, 2003 (USING SAMMEC METHODOLOGY FIGURES)

Smoking-related Diseases Health Care Costs

Productivity Losses from Death

Productivity Losses from Disease

Total Costs

Lung Cancer 9,188,871 189,709,987 3,407,151 202,306,009 CVD 507,315,052 2,930,533,343 38,910,556 3,476,758,951 CAD 236,888,476 1,312,836,695 88,922,515 1,638,647,686 COPD 104,561,119 569,530,925 54,043,648 728,135,692 All 4 Diseases 857,953,518 5,002,610,950 185,283,871 6,045,848,339

*$1=PhP 52. Source: DOH et al. (2006).

An extended benefit of the revenue objective is the eventual fruition of the universal health care program. Fruition, in the sense that up until now, the universal health care is still not universal—as it covers only 53 percent of the population, a fact openly recognized by the DOH. Of these, only 42 percent have availed themselves of the services with merely 34 percent support value for a total benefit delivery ratio of eight percent.

Given the Aquino administration’s widespread support for the KalusuganPangkalahatan program, it is

imperative for the government to allocate resources for the success of this initiative. This follows from the fact that one of the significant obstacles to attaining universal health care is the lack of financial resources directed towards the stated health agenda. Ultimately, sin taxes are widely supported by the general population. According to a nationwide survey, about 80 percent of the population including smokers and drinkers is agreeable to the imposition of excise taxes on their vices. Due to the support this particular tax garners, it should ideally be easier for politicians to decide on the aforesaid measures. COSTS OF SIN TAXES There is no such thing in economics that does not incur any cost. As with any tax measure, sin taxes likewise have costs attached to them. Politicians against excise taxes, as well as tobacco and alcohol companies, always use the argument of unemployment and the possible decline of the industry. There are assertions that an increase in prices as a result of the tax hike will be borne by both producers and consumers, endangering the survival (or profitability) of such business entities. Aside from these, well-meaning politicians claim that sin taxes are by their inherent nature regressive—hence, they damage the poor more than the affluent. Empirical data have proven that sin taxes generally affect the low- and middle-income earners who patronize these sin products. Another natural result ensuing from the tax hikes is the creation of black markets or the incidence of smuggling. Being addicted to these goods, consumers who cannot afford the higher price of cigarettes and alcohol look to other (often illegal) sources. Another related effect would be the consumption of higher-intensity goods (higher tar or alcohol content), which is counterproductive in that it leads people to consume more harmful products in the process.


Equally as controversial is the contention that, as with any other good or activity, every individual has the freedom to choose for himself. The dispute of “personal choice” or more commonly known as “individual sovereignty” can be thought of as an offshoot from the popular adage: “To each his own (poison).” In fact, opponents of the sin tax claim, “smoking is pleasurable as in many other things. Instead of sin products, these products should be called pleasurable products”. Indeed, smoking can be seen as just another activity that people enjoy doing, and just like any other activity, people are free to do it as they please. COST-BENEFIT ANALYSIS OF SIN TAXES Analyzing both costs and benefits is crucial in deciding whether or not sin taxes are indeed advantageous to society. One argument is that smokers and drinkers actually save the government from spending more for healthcare since they are assumed to have shorter life expectancies. However, such an argument must be questioned—although these people may have shorter years, they may actually spend more for treatment costs. There is no telling as to which is more costly: a longer life expectancy or a shorter one with higher morbidity costs.Despite the claim that sin taxes are regressive, there is something that can be done to lessen their adverse effects on the poor. If the tax hike is significant enough, it can deter the poor from actually purchasing the good. This may result in less healthcare costs and a more productive workforce. The question ofregressivity also deserves a second look. Cnossen echoes Gruber and Köszegibyforwarding an argument that changes the perspective on the burden distribution of the traditional excise duties:

“Tobacco taxes, for instance, have often been vilified for falling much more heavily on the poor than on the rich. But in Gruber and Köszegi’s view the goal of tax incidence is not only to measure who pays more of the tax, but rather who is “hurt” most by it. Those who are hurt most by the tax are also those who are most price sensitive to tobacco, meaning that their self-control value of taxation is larger. By this reasoning they find that tobacco taxes may actually be progressive. And much the same reasoning applies to alcohol taxes.”

Although lost jobs are valid as an argument, there is a way to solve this short-term problem. Since taxes generate revenue, the government may allocate some of these to help the laborers affected by the change in the tax system. In fact, it has been shown that tobacco farmers would gain more by changing employment (i.e. shifting to alternative crops). However, the industry claim that sin taxes can hurt the economy is purely unfounded. By analyzing the labor data, one can observe that the share of tobacco farming, manufacturing, wholesale, and retail sectors in total employment in the Philippines is less than one percent.In fact, there has been a decreasing trend for the share of tobacco employment to total employment over time.


Smuggling is a real outcome of sin taxes; however, it is up to the government to impose efficient systems to run after lawbreakers and offenders. However, according to Euromonitor, “the illicit tobacco trade in the Philippines is relatively low compared with other countries, as the Philippines maintains some of the lowest cigarette unit prices anywhere in the world. The smuggling of locally produced cigarettes to other countries is possible due to the low unit prices of cigarettes and comparatively low excise taxes in the Philippines. However, the quantity of cigarettes illegally brought out of the Philippines is estimated to be insignificant.” Smoking, indeed, is like any other activity that is within the personal choice of every individual. However, as with any other activity, one’s personal choice (especially in smoking and drinking) has a social dimension to it. In this case, smoking or drinking is never in isolation; as a matter of fact, these activities frequently have effects on persons other than the individual. Sin taxes are also a case of a win-win scenario. In the first instance, government, in raising taxes, earns more revenue to fund its programs and balance its budget. However, if this does not happen, it means that the taxes are so great as to dissuade people from committing their vices. The ideal scenario is when optimal taxes are imposed: government raises taxes enough to earn revenues and simultaneously deter people (especially low-income earners) from engaging in those activities. However, a question remains unanswered. Why is it that sin tax reforms continue to be elusive despite being more socially beneficial? Here is where politics, and not economics, reigns supreme. Economics dictates that sin taxes are marginally more beneficial to society (perhaps a reflection of why it is popular to most people). However, politics plays a bigger role in that larger corporations (specifically Philip Morris Fortune Tobacco Corporation) can lobby their stands more efficiently than individuals because there is no one group that unites all these people. There are different groups vis-à-vis the bigger business entities that appear to have greater lobbying power over the politicians (said to repay their debt to the businessmen who funded their campaigns). The cost-benefit analysis is not absolute; that is, it really depends on how the observer or analyst weighs each cost and benefit. For the author, there is a net benefit to sin taxes, especially when social costs and benefits are taken into consideration. Following are the policy recommendations, but before those, the elements of an efficient tax system. ELEMENTS OF AN EFFICIENT TAX SYSTEM

POLICY RECOMMENDATION After a rigorous discussion of what sin taxes are, what they are for, sin tax systems in the Philippines and its neighboring countries, as well as costs and benefits of the tax structure, it is but fitting to arrive at a recommendation of the policy reform that must take place given all the preceding analyses.

Economic Efficiency!

• not distortionary!

• enhance efficiency!

Administrative Simplicity!

• low costs of administration and compliance!

• easy to understand!

Flexibility!

• allow easy adaptation to changes in conditions!

Political Responsibility!

• should be transparent!

• consultative!

Fairness and Social Justice!

• equitable distribution!

• same products, same tax!


We propose a revised sin tax law, with a higher rate, a completely specific form and a uniform tax rate

for all tobacco and alcohol products. Although an exact figure cannot be proposed, the general idea is that it must be raised in order to be at par or closer to its ASEAN neighbors. More studies must be made to determine the optimal sin tax rate. Aside from this, revenue generated from the increased tax collections must be allocated mostly to healthcare programs, especially now that the incumbent administration promises universal healthcare for every Filipino. The subsequent table explains how we arrived at our recommendations using the essential elements of an efficient tax system as the main decision criteria. Subjective ratings were used to compare the present and proposed tax laws across each area of consideration.

TABLE 9: COMPARISON OF PRESENT AND PROPOSED SIN TAX LAW

Criteria Present Sin Tax Law: Low rate Mix of specific and Ad valorem Multi-tiered system

Proposed Sin Tax Law: High rate Specific with indexation Uniform tax rate

Economic Efficiency

The advantage of low rate taxation is the presence of smaller deadweight loss. However, this might not be efficient in that economies of scale are not maximized.

The higher rate is imposed in hopes of internalizing the externality present in such activities.Uniform tax rates also increase efficiency by discouraging smuggling.

Administrative Simplicity

Despite being specific, the biannual changes are in essence like ad valorem because of constant change. Aggravating this is the multi-tiered system for different types of products, for varying level of prices.

In addition to the simplicity of specific taxes, having a uniform rate makes collection easier for all types of products.

Flexibility Specific taxation inherently is fixed or sticky and is easily eroded by inflation. More pronounced for countries like the Philippines, tax reforms are hard to initiate and hence, the importance of a flexible rate is emphasized.

Although an ad valorem tax rate is inherentlymore flexible, a specific rate with indexation for inflation can do the job. When the right rate is set, there is no need for constant reform of the tax code, only adjustments made via the inflation index.

Political Responsibility

The presence of a multi-tiered system bestows power on tax authorities to classify brands accordingly. Thus, this is open to abuse and manipulation, just as the current system is favoring old brands over new ones, discouraging competition.

Given that a uniform tax rate is used, there is no room for manipulation. A uniform tax rate must be applied to products, regardless of whether they are old or new. This prohibits tax authorities from using their influence to control the law.

Fairness and Social Justice

With the multi-tiered system, there is an attempt to classify brands according to price and charge a premium on high-priced goods. However, this is defeated by the misclassification of brands.

With a specific tax for all products, there is no favoring of old versus new brands. Moreover, although sin taxes are said to be regressive, the revenues collected can be used to make the whole system benefit those in need.

PROPOSED SIN TAX BILLS

Public interest dictates that priority be given to restructuring the current tax system to remedy the myriad problems associated with it. The achievement of health and health objectives will be more attainable if the reforms to be effected include the removal of the price classification freeze, indexation of taxes to inflation, shifting to a unitary tax system, and increases in the tax rate that significantly increase cigarette prices. The succeeding table shows the revenue impact estimate of all the sin tax bills currently filed.


TABLE 10: SUMMARY OF ESTIMATES OF INCREMENTAL REVENUE IMPACT (LOCAL) (in billion pesos) 2012 2013 2014 2015 2016 2017 Cong. Mandanas 44.24 Cong. Suarez 38.47 Cong. Aumentado 11.01 Cong. Limkaichong, Teves, Arnaiz 19.35 24.38 Cong. Abad 58.54 72.43 65.55 Cong. Javier 0.54 (1.17) (3.8) Cong. Singson (1.36) (3.67) (6.64)

Source: DOF Presentation at the Ways and Means Committee Hearing, March 21, 2011 There are seven sin tax bills being deliberated by the House Ways and Means Committee of the 15th Congress. House Bill 3465 filed by Batanes Representative Henedina Abad; House Bill 2687 filed by Representatives Jocelyn Limkaichong, George Arnaiz and Pryde Henry Teves; House Bills 2485 filed by Representative Erico B. Aumentado; House Bill 3183 filed by Representative Danilo Suarez; House Bill 3487 filed by Representative Neil Tupas; House Bill 3666 filed by Representative Paolo Javier; and House Bill 3059 filed by the (former as 2/14/12) committee chairman HermilandoMandanas.

Among them, three are endorsed by the DOF and DOH, specifically, HB 3465 filed by Rep. Abad, HB 3489 filed by Rep. Tupas and HB 2687 filed by Reps. Teves, Arnaiz and Limkaichong. This is understandably so as these bills are the most comprehensive in that they propose the complete set of tax reforms needed to reduce tobacco consumption effectively and raise the most significant amount of revenues for the government. The said bills are compared in the following table.

TABLE 11: EXCISE TAX INCREASE PROPOSALS ENDORSED BY DOF AND DOH

Proposed Tax Reforms Proposed % Change in Excise Tax

Proposed Year of

Implementation Indexation Price

Classification Freeze

Uniform Tax Structure

HB 3465 (Abad) HB 3489 (Tupas)

Uses overall CPI as basis ü ü 215 2012

HB 2687 (Teves, Limkaichong, Arnaiz)

Uses index for tobacco products as basis

ü ü 81 2011

The DOF estimates that the adoption of HB 3465, HB 3489 and HB 2687 will result in at least Php 58.54 billion, Php 58 billion and Php 19.35 billion in incremental revenues for the first year of implementation alone. The passage of any one of these bills will enable the government to meet both short-term and long-term health objectives. If a tobacco tax measure is implemented, smoking prevalence is projected to be reduced by at least five percent in the first year, which is twice greater than at least 2.5 percent per year beginning 2011.

According to Sta. Ana and Latuja, HB 3465 and HB 3489 are projected to make the most impact in terms of number lives saved, reduction in smoking prevalence and additional excise tax revenue. In the simulation for tobacco tax impact of the reform bills in the study, it was shown that the 215 percent increase in cigarette excise tax under HB 3465 and HB 3489 would result in the reduction of smoking prevalence to 23 percent from 2010 levels of 28 percent. An increase of 81 percent in excise tax under HB 2687, on the other hand, would result in the reduction of prevalence rates to 25 percent.


Estimates also show that 1,130 lives would be saved with the adoption of HB 3465 and HB 3489 and would bolster the financing of health initiatives by the collection of an additional Php 26 billion of excise tax revenues at the least, in the first year alone. The table below summarizes the impact of the respective excise tax increase proposals.

TABLE 12: IMPACT OF THE EXCISE TAX INCREASE PROPOSALS

2010 Levels Future Values House Bill HB 3465 & HB 3489 HB 2687 % Increase in Excise Tax 215% 81% Average Retail Price Per Pack (PHP) 19.27 33.38 24.59 Average Total Tax Per Pack (PHP) 7.92 22.04 13.24 Tax as % of Retail Price 41.1% 66.0% 53.9% % Increase in Retail Price 73.2% 27.6% Reduction in Number of Smokers (thousands) -0.235 -0.87

870 3,230

390

1,460 Number of Lives Saved (thousands) -0.235 -0.87

310 1,130

140 510

Total Number of Smokers (thousands) -0.235 -0.87

17,300

16,430 14,070

16,910 15,840

Smoking Prevalence -0.235 -0.87

28.3%

26.9% 23.0%

27.7% 25.9%

% Change in Smoking Prevalence -0.235 -0.87

-5.0% -18.7%

-2.3% -8.4%

Additional Excise Revenue (PHP million) -0.235 -0.87

48,196 26,008

19,252 12,604

% Change in Excise Revenue -0.235 -0.87

177.7% 95.9%

71.0% 46.5%

Total Cigarette Tax Revenue (PHP million) -0.235 -0.87

36,683

89,916 63,429

57,897 49,598

% Change in Tax Revenue -0.235 -0.87

145.1% 72.9%

57.8% 35.2%

% Change in Industry Revenue -0.235 -0.87

-11.9% -37.8%

-5.5%

-19.1% Source: Cigarette Affordability and the Impact of Tobacco Taxation on Health and Revenues (2011) OBJECTIONS TO POLICY REFORM As regards the proposed policy reform, two major objections can be made against such recommendation. First, the issue of form, ad valorem versus specific taxation, may be raised. Second, the high tax rate is argued to be unconscionable by affected industries and workers. Despite each objection having its own merit, we will attempt a defense of the proposed policy change, thus rendering such concerns invalid.


Although specific taxation is said to be more easily administered because of a fixed amount, in the Philippine setting, such simplicity is not taken advantage of. Adding to the specific taxation is the multi-tiered system and the biannual change in taxes that actually contribute to the complexity of the tax structure. Another case against specific taxation is its fixed rate—and as a result, making changes is difficult and remains contingent on the approval of Congress. Hence, in the Philippines’ case, specific taxation by itself is not sufficient. It needs to be complemented by indexation. Indexing to inflation will dispel the need for any multi-tier system that only authorizes tax officials to classify brands according to tiers (which is open to corruption and abuse). Moreover, the steady, biannual increases in taxes will no longer be needed provided that indexation adjusts according to the price. As a corollary, it is able to modify its rate without being eroded by inflation. The second argument in support ofindexation is that there is no need to constantly change the rate structure. Specifically for the Philippines, it is significantly advantageous because passing a new bill or revision to a current bill takes a tremendous amount of time, effort and eventually, cost. Thus, in states with rigid institutions such as the legal system, a flexible tax rate will prove to be beneficial. On the whole, as seen in the trend towards specific taxation, the Philippines must review its current structure based on two considerations: first, indexation is better adjusted to the times; second, there is no need for constant revisions (especially for legislative systems that are rigid like in the Philippines).

TABLE 13: CHANGES IN TAX FORMS Country Prior System New System Year of Switch

Australia2 Mixed weight-based specific and ad valorem

Specific—unit based if ≤ 0.8kg/000; weight based if > 0.8kg/000

1999

India Ad valorem—based on retail price Specific length based structure 1997 Japan Mixed specific and ad valorem Specific—unit based 1989 Korea Ad valorem—based on CIF price Specific—unit based 1988 Maldives Ad valorem—based on CIF price Specific—unit based 2000 New Zealand ??? Specific—unit based if ≤ 0.8kg/000;

weight based if > 0.8kg/000 ???

Philippines3 Ad valorem—based on ex-factory price Specific—based on price bands 1997 Taiwan Ad valorem—based on CIF price Specific—unit based 1987 Table obtained from Emil Sunley’sTobacco Excise Taxation in Asia: Recent Trends and Developments Perhaps the more controversial issue is the proposed tax rate hike. Again, there is no exact rate suggested yet as this requires more comprehensive studies on optimal taxation. The new rate must strike a balance between earning revenues for the government while deterring people (especially the impoverished) from engaging in such behaviors. What is most problematic about a tax rate hike is the probable massive decline of the industry as well as the possible unemployment resulting from it. First, the very lucrative and immensely profitable tobacco and alcohol industries will not experience great deterioration as a result of the tax hike. There is no denying that taxing normal goods will affect the price and therefore, quantity demanded by consumers. However, tobacco and alcohol are not exactly like other normal goods. To their advantage, they are addictive and that implies a more inelastic demand. Another case supporting this is that the Philippines, as verified by research, has one of the highest cigarette and liquor consumption rates in Asia. Hence, the market is seen to grow and unlike their claims, the industry will not significantly weaken. It will suffer (as will any industry that is taxed), but it will certainly survive.


Second, the danger of rising unemployment exists. Despite its validity as an argument, there are solutions that can serve to counter it. First, the government, through its projects, can initiate temporary job creation for those affected by the “downsizing” of the industry. Complementary to this is the government’s use of a part of the collected tax revenues to support these laborers, especially the Virginia tobacco farmers. Although initially the government may incur costs for these activities, it only proves that such an argument is not sufficient to offset the benefits of imposing a sin tax. DRAWBACKS OF POLICY REFORM

Ensuing from the imposition of higher tax rates is the incidence of smuggling. As economists would put it, the higher the tax rate on sin products, the greater the benefit is for smugglers. Black markets are created as a result of these tax hikes. Despite the validity of such arguments, there are ways to mitigate this problem. First, the government must effectively enforce the law and punish violators with grave penalties. Second, we suggest that the tax hike, not be exorbitantly high. The basic idea behind sin taxes is to make the consumption of goods more expensive, not to forbid them per se. Finally, having a uniform tax rate as compared to a multi-tiered system, according to EU Representative Therese Yosuico, can help curb smuggling. This can also be applied in international cases where harmonizing tax rates across countries may help in stopping black market transactions by lessening the incentives of looking for cheaper alternatives when prices are relatively uniform.


REFERENCES [1] Assunta, M. (n.d.).Impact of Alcohol Consumption on Asia.[2] Warwick, R. (2007). Identifying Tax Expenditures in Alcohol: A Tool for Policy Making.[3] Center for Social and Health Outcomes Research and Evaluation. (2006). Alcohol Taxation in the Western Pacific Region.[4] Richupan, S. (2005). Alcohol Products Taxation: International Experiences and Selected Practices in Asia.[5] Ross, H. (n.d.). Regional Picture of Tobacco Tax and Policy.[6] HealthJustice Philippines. (2010). Philippines Tobacco Tax Report Card.[7] National Tax Research Center. (2009). Taxation of Alcohol Products in ASEAN Countries.NTRC Tax Research Journal, XXI.2, 1-11.[8] National Tax Research Center. (2007). Taxation of Tobacco Products in ASEAN Countries.NTRC Tax Research Journal, XIX.6, 1-13.[9] National Tax Research Center. (2004). Elasticity of Demand for Cigarettes, 2002-2003.NTRC Tax Research Journal, XVI.5, 1-6.[10] Singian, M.R. (2009). New Tax Structure Deferred.[11] Framework Convention on Tobacco Control Alliance, Philippines. (2009). Tobacco Taxation.[12] O’Donoghue, T. & Rabin, M. (2006).Optimal Sin Taxes.[13] Grossman, M., Sindelar, J.L., Mullahy, J. & Anderson, R. (1993). Policy Watch: Alcohol and Cigarette Taxes. The Journal of Economic Perspectives, 7, 211-222.[14] Sarma, A. (2000). Regulating Tobacco Use: Role of Taxes. Economic and Political Weekly, 35, 4613-4616.[15] Sumner, D. &Wohlgenant, M. (1985). Effects of an Increase in the Federal Excise Tax on Cigarettes.American Journal of Agricultural Economics, 67, 235-242.[16] Viscusi, W.K. (1995). Cigarette Taxation and the Social Consequences of Smoking. Tax Policy and the Economy, 9, 51-101.[17] Moore, M. (1996). Death and Tobacco Taxes.The RAND Journal of Economics, 27, 415-428.[18] Jackson, J.D. & Saba, R.P. (1997). Some Limits on Taxing Sin: Cigarette Taxation and Health Care Finance. Southern Economic Journal, 63, 761-775.[19] Break, G.F. (1954). Excise Tax Burdens and Benefits. The American Economic Review, 44, 577-594.[20] Fonbuena, C. (2009). Sin Tax Amendment Bill Hits Snag. Retrieved December 19, 2011, from www.newsbreak.com.ph/.[21] Rimando, L. (2010). How the Sin Tax Policy Created a Duopoly. Retrieved December 17, 2011, from www.abs-cbnnews.com/business/02/25/10/how-sin-tax-policy-created-duopoly.[22] (2004). Republic Act 9334, Sin Tax Law: An Act Increasing the Excise Tax Rates Imposed on Alcohol and Tobacco Products, Amending for the Purpose Sections 131, 141, 142, 143, 144, 145 and 288 of the National Internal Revenue Code of 1997, As Amended.[23] Reuters. (2009). Will the Philippines Pass New ‘Sin’ Taxes?. Retrieved December 20, 2011, from www.abs-cbnnews.com/business/08/12/09/will-philippines-pass-new-sin-taxes.[24] Altman, A. (2009). A Brief History of: Sin Taxes. Retrieved December 20, 2011 from www.time.com/time/magazine/article/0,9171,1889187,00.html.[25] Sadowsky, J.A. (1994). The Economics of Sin Taxes.Religion& Liberty. Retrieved December 21, 2011 from www.anthonyflood.com/sadowskysintaxes.htm.[26] abs-cbnNEWS.com. (2009). Teves Pushes Sin Tax Reforms, Cites 82% Pinoys OK Higher Cigarette Taxes. Retrieved December 17, 2011, from www.abs-cbnnews.com/business/ 01/16/09/govt-moves-boost-revenues-eyes-more-sin-tax.[27] Reuters. (2010). Philippines to Post Record Budget Deficit in 2010. Retrieved December 19, 2011, from www.abs-cbnnews.com/business/05/03/10/philippines-post-record-budget-deficit-2010.[28] Rampell, C. (2010). For Cash-Strapped States, Sin is Sure Lucrative. Retrieved December 18, 2011, from www.nytimes.com/2010/04/18/weekinreview/18rampell.html.[29] abs-cbnNEWS.com. (2010). Health Groups Back Higher Sin Taxes. Retrieved December 18, 2011, from www.abs-cbnnews.com/business/08/09/10/health-groups-back-higher-sin-taxes.[30] National Statistical Coordination Board. (2011). National Government Cash Budget, 1996 to 2009. Retrieved December 19, 2011, from www.nscb.gov.ph/secstat/d_finance.asp.[31] Bureau of Treasury. (2011). Monthly and Yearly Statistics. Retrieved January 5, 2012, from www.treasury.gov.ph/statdata/statdata.html.[32] Diokno, B.E. (2010). Highly Improbable Tax Target. Retrieved December 20, 2011, from www.bworldonline.com/main/content.php?id=15235. [33] Yap, K. &Estayo, M. (2010). Philippine Budget Deficit Exceeds First-Half Target as Spending Increases. Retrieved December 21, 2011, from www.bloomberg.com/news/2010-06-22/philippine-budget-deficit-exceeds-first-half-target-as-spending-increases.html.[34] Agence France-Presse. (2010). Philippine Budget Deficit Soars to 17% - Exec. Retrieved December 21, 2011, from www.business.inquirer.net/money/breakingnews/view/20100125-249375/Philippine-budget-deficit-soars-to-17exec.[35] Balea, J. (2009). 2010 Burden: Philippine Deficits and Debts. Retrieved December 20, 2011, from www.abs-cbnnews.com/business/12/31/09/2010-burden-philippine-deficits-and-debts.[36] abs-cbnNEWS.com. (2009). Despite Higher Tax Rates in Q1, Sin Tax Collections Plunge 21%. Retrieved December 18, 2011, from www.abs-cbnnews.com/business/06/12/09/makers-sin-products-skirt-higher-excise-tax-rates-collections-plunge-21-q1.[37] Reuters. (2009). Philippines Sees Record 2009, 2010 Budget Deficits. Retrieved Decenber 17, 2011, from http://news.alibaba.com/article/detail/markets/100224769-1-update-1-philippines-sees-record-2009252C.html.[38] Romero, P. & Diaz, J. (2004). ‘Sin’ Tax Bill Approved. Retrieved December 19, 2011, from www.newsflash.org/2004/02/be/be003028.htm.[39] GMANews.TV. (2007). Sin Tax Collections Fall 9% to P19.8B in H1 Despite Higher Rates. Retrieved December 19, 2011, from www.gmanews.tv/story/54478/sin-tax-collections-fall-9-to-p198b-in-h1-despite-higher-rates.[40] Valdez, K. (2010). Improving Tax Efficiency Not Enough, Says S&P. Retrieved December 20, 2011, from www.manilatimes.net/index.php/business-columns/20792-improving-tax-efficiency-not-enough-says-sap.[41] Remo, M.V. (2008). Alcohol, Tobacco Tax Collection Down in ’07. Retrieved December 18, 2011, from www.newsinfo.inquirer.net/breakingnews/nation/view/20080220-119971/Alcohol-tobacco-tax-collection-down-in-07.[42] NationMaster.com. (2010). Cigarette Consumption (Most Recent) By Country. Retrieved December 22, 2011, from www.nationmaster.com/red/pie/hea_tob_cig_con-health-tobacco-cigarette-consumption.[43] World Resources Institute. (2010). Alcohol Consumption Per Capita. Retrieved December 21, 2010, from www.earthtrends.wri.org/searchable_db/index.php?step=countries&ccl.[44] Gonzales, I. (2009). One Rate for ‘Sin’ Taxes to Help Curb Smuggling – EU. Retrieved December 21, 2011, from www.philstar.com/Article.aspx?articleid=505243.[45] Sunley, E.M. (2007). Tobacco Excise Taxation in Asia: Recent Trends and Developments. [46] World Health Organization. (2011). Western Pacific Region, Health Topics, Tobacco. Retrieved January 5, 2012, from http://www.wpro.who.int/health_topics/tobacco/.[47] Quimbo, S., Casorla, A., Miguel-Baquilod, M., &Medalla, F. (2008).The Economics of Tobacco Taxation: Philippines. Unpublished.[48]U.S. Department of Health and Human Services.The Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of the Surgeon General. Atlanta, GA: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, Coordinating Center for Health Promotion, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 2006.[49] World Health Organization. (2002). Smoking Statistics. Retrieved January 7, 2012, from http://www.wpro.who.int/media_centre/fact_sheets/fs_20020528.htm.[50] World Health Organization. (2009). Regional Action Plan for the Tobacco Free Initiative in the Western Pacific Region (2010-2014).Manila.[51] World Health Organization. (2010). WHO Technical Manual on Tobacco Tax Administration: Regional Training Workshop on Tobacco Taxation. Manila.[52] Department of Health. (2010). Philippine Global Adult Tobacco Survey 2009 Fact Sheet.[53] Department of Health. (2008). Philippine Global Youth Tobacco Survey 2007 Fact Sheet.[54] Department of Finance Revenue Impact Estimates, as presented in the House Ways and Means Committee Hearing, March 21, 2011.[55] EuromonitorInternational.Tobacco in the Philippines, 2011.[56] EuromonitorInternational.Alcoholic Drinks – Philippines, 2011.[57] World Health Organization. (2011). Alcohol Fact Sheet.Retrieved January 13, 2012, from http://www.who.int/mediacentre/factsheets/fs349/en/.[58] Sta. Ana, F. III &Latuja J. (2011). Cigarette Affordability and the Impact of Tobacco Taxation on Health and Revenues. [59] World Health Organization. (2011). Global Status Report on Alcohol and Health 2011.Retrieved January 8, 2012, from http://www.who.int/substance_abuse/publications/global_alcohol_report/profiles/phl.pdf[60] Community Anti-Drug Coalitions of America in Cooperation with the Center for Science in the Public Interest. (n.d.). Increasing Alcohol Taxes to Fund Programs to Prevent and Treat Youth-Related Alcohol Problems. Retrieved January 13, 2012, from http://www.cspinet.org/booze/Alcohol_Tax.pdf.[61] Prakongsai, P., Patcharanarumol, W. &Tangcharoensathien, V. (2008). Can Earmarking Mobilize and Sustain Resources to the Health Sector. Retrieved January 8, 2012, from http://www.who.int/bulletin/volumes/86/11/07-049593/en/index.html[62] Buchanan, J. (1963). The Economics of Earmarked Taxes.Journal of Political Economy, 71, 457-469.[63] Cnossen, S. (2010).The Economics of Excise Taxation. International Studies Program Working Paper 10-18.Retrieved January 8, 2012, from http://aysps.gsu.edu/isp/files/ispwp1018.pdf. [64] Shughart, W. (n.d.). The Economics of Excise Taxes.[65] Alechnowicz, K. & Chapman, S. (2004). The Philippine Tobacco Industry: ‘‘The Strongest Tobacco Lobby In Asia’’. Retrieved January 7, 2012,http://tobaccocontrol.bmj.com/content/13/suppl_2/ii71.full.pdf+html.[66] Department of Health. (2011). Department Order 2011-0188: KalusuganPangkalahatan Execution Plan and Implementation Arragements.[67] Department of Health. (2010). Administrative Order 2010-0036: The Aquino Health Agenda: Achieving Universal Health Care for All Filipinos.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Conclusion: Taxing Sin is No Sin At All

Last year, 2011, did not bode well for the Philippines. Up until the third quarter, it continued to be haunted by slow growth partly caused by underspending. The country needs financing sources in order to provide more room to spend and grow. An attractive and popular proposal is the tax hike for sin taxes on tobacco and alcohol. Given the very low rate and flawed structure of sin taxes, it is imperative that government review its policy, especially with the deficit. Cost-benefit analysis shows that revamping the current system is more beneficial to society in the following respects: increased tax revenues, possible behavior modification, limiting externalities, simplified tax structure, more adjustability to inflation and less need for future tax reforms. Therefore, the policy recommendation is to adopt a higher yet uniform specific tax rate with indexation. In summary, the policy paper has illustrated the necessity of reforming the sin tax system in the Philippines, for the sustainable growth of the country. Indeed, taxing sin is no sin at all.

When the solution is simple, God is answering.

Albert Einstein

Unit 1403 West Trade Center 132 West Aveneue, Quezon City

1104 Philippines

[email protected]

are sin taxes sinful? - action for economic reforms...in 2004, the united states surgeon general...

Documents