The proposed two-tier approach on tobacco tax under House Bill (HB) 4144 is seen increasing government revenues as it tends to approximate the tax imposable to taxpayers based on their respective income levels, according to a University of the Philippines economics professor.
“There is a need to modify the existing unitary tax system to a two-tier approach to preserve revenues derived from low-income consumers who constitute the bulk of cigarette consumption,” Dr. Ernesto R. Gonzales said.
The London School of Economics-educated professor said the concept of price elasticity shows that the rich sector of society is less responsive to price increases than low-income consumers.
“A unitary system is inequitable because it essentially makes the poor or low-income sector devote a higher percentage of their income to paying the tobacco tax than higher-income individuals who can actually afford to do so,” he said.
“Besides, a unitary system impedes on consumers’ freedom to choose a product that suits their level of income,” Gonzales argued.
Gonzales said the demand for cigarettes is omnipresent and one of the easiest ways for the government to generate revenues is to “fine” smokers by way of taxation.
Harvard expert on regressive tax effect
A study by Dr. Dahlia K. Remler, an expert on the issue of health economics at Harvard University, says cigarette taxes have been found to be regressive for two reasons.
First, sales tax are generally regressive because the rich save and invest a large portion of their income than the poor, and so the poor spend a larger share of their income on consumption.
Second, since the prevalence of smoking is higher among the poor, cigarettes are, in fact, disproportionately consumed by the poor.
The two-tier approach will lessen the impact of the regressive tax as it tends to approximate the tax imposable to taxpayers based on their respective income levels.
The International Monetary Fund (IMF) itself stated, “Ultimately, tobacco excise-tax rates must reflect the purchasing power of the local consumers, rates in neighboring countries and, above all, the ability and willingness of the tax authority to enforce its compliance.”
Fr. Joaquin Bernas opined in his commentary on the 1987 Philippine Constitution (2009) that the explicit mention of progressive tax in the Constitution reflects the wish of the Convention that the legislature, following the social justice command, should use the power of taxation as an instrument for a more equitable distribution of wealth.
HB 4144 proposes a two-tier system with an excise tax rate of P32 per pack on cigarette packs priced P11.50 and below (low-end), and P36 for those priced higher (premium) and a 5-percent increase thereafter beginning 2018.
In his explanatory note Party-list Rep. Eugene Michael B. de Vera of ABS, the bill proponent, argued that incremental revenue is expected to increase the government’s budget, which may be used to fund more social and vital infrastructure projects.
The precursors of the current sin tax law, HB 5727 and Senate Bill 3299, considered and provided for the two-tier approach, which was eventually rejected.
Staunch two-tier supporter Sen. Ralph G. Recto predicted in a Philippine Daily Inquirer report dated October 14, 2012, that a radical change in structure from the original four-tier to a one-tier or unitary system means a move to lost revenues.
The Aquino administration, instead, passed a unitary tax system into law, thinking it would result in an increase in revenues.
However, Department of Finance data as of October 2016 revealed an excise tax collection decrease of 13.30 percent, or more than P8 billion, from the previous year, ultimately making the unitary system a counterproductive measure.