THE rapid increase in the country’s per-capita income will prevent higher “sin” taxes from radically reducing Filipinos’ consumption of alcoholic beverages, legislators and economists have said.
In a briefing on Tuesday, House Committee on Ways and Means Chairman Joey Sarte Salceda said that by his own reckoning, the impact of the newly signed Republic Act 11467 which amended the country’s tax code will only be good for 18 months.
Salceda said with this, it is not only important to conduct a review of the rates after the third year of implementation, but also consider higher rates.
“The number of bottles may go down a bit, there would be some reduction in the volume” after the second round of tax hikes, Salceda said, but added this impact won’t be for long. “We need to increase [the rates] further after three years because per-capita income will catch up with the rates. The increase in our nominal GNP [Gross National Product] is also very rapid. After 18 months, consumption will return to its current level.”
Senate Committee on Ways and Means Chairman Pia S. Cayetano agreed that higher sin tax rates are needed to reduce alcohol consumption, especially in the case of binge drinkers.
Cayetano told the BusinessMirror that to begin with, the rates that she was pushing for in the law were significantly higher.
She, however, said it was not right to conduct a review of the law only after a few months a piece of legislation is passed.
Cayetano said it is important that the Food and Drug Administration (FDA) be allowed to do its job of regulating sin products.
“The rates that I wanted were much higher, there’s no question there. But you know, its our democratic process, I was outvoted on the rates so these are the rates for now,” Cayetano said.
‘Index rates to income growth’
Action for Economic Reforms Coordinator Filomeno Sta. Ana III said one of the most ideal ways to lower consumption of sin products is to index tax rates to the growth of incomes.
Currently, he said, sin taxes are indexed to inflation, which are higher than the increase in incomes. This is able to address the erosion of revenues in real terms.
A better solution, Sta. Ana said, is to index tax rates to the growth of nominal GDP to take into consideration price increases and Filipinos’ incomes.
“The increase should be equal to the growth rate of nominal GDP. It will be more effective in addressing affordability,” he added.
Inelastic demand
Salceda estimated that at the current rate of alcoholic beverage consumption, Filipinos are consuming 240 million liters of pure alcohol.
Of this amount, Salceda said around 100 million liters are consumed through various beers and fermented alcoholic beverages while the rest or 140 million liters are consumed through gin.
He expects that under the most recent law, this can decline to around 200 to 225 million liters. But after 18 months, he sees consumption reverting to its original level of 240 million liters per year.
“Each drinker consumes 4.6 liters per year,” Salceda said. “I explained it this way so that we will understand that the impact is not that dramatic. We need the next administration to make the necessary adjustments to reduce consumption and make a significant impact on noncommunicable diseases.”
Sta. Ana explained that the reason consumption will increase after 18 months is the fact that demand for sin products like alcoholic beverages have become inelastic.
Products and services that are said to have inelastic demand refer to those that will be purchased or be in demand regardless of the cost or price.
If incomes increase in the next few months, those who cut back on their consumption of alcoholic beverages will have the purchasing power to be able to buy more or at the same rate they did before the law was passed.
“[People] will adjust to the new price level to return to the previous level of consumption,” Sta. Ana told the BusinessMirror. “[This is highly plausible] remember, people’s incomes are increasing.”
Sta. Ana said this is actually the argument against the claim of the industry that higher taxes will cause their sales to decline.
Tax terms
The National Sin Tax Coalition said the law increased excise tax on distilled spirits to P42 per proof liter with a 22 percent ad valorem tax effective this year.
The specific will be raised to P47 in 2021; P52 in 2022; P59 in 2023; P66 in 2024; and 6 percent every year, thereafter.
The tax on fermented liquors will be raised to P35 this year from P25.4 prior to passage of the law.
This will be raised to P37 in 2021; P39 in 2022; P41 in 2023; P43 in 2024 and 6 percent annually in each succeeding year.
For alcohol, a specific tax of P50 will be imposed on all wines beginning this year with a 6-percent increase annually in succeeding years.