Higher cigarette taxes: A promise compromised?

(First of 4 parts)

MANILA, Philippines – It started out as close to ideal.

House Bill 5727, authored by House appropriations committee chair Joseph Emilio Abaya (1st district, Cavite), sought to replace the 4-tiered system of taxing tobacco and alcohol with a unitary one, and index the rates to inflation starting immediately.

The new excise tax structure was projected to generate for government additional P60 billion in the first year of implementation. Data from the Department of Finance (DoF) projected incremental revenues at P84.28 billion for the second year, P118.63 billion for the third, and P129.19 billion for the fourth.

This could have provided a big boost for a government that must be able to collect revenues to address the fiscal deficit and free up funds for education and health care, and to secure its first-ever investment grade credit rating from international agencies that back excise tax reform.

More importantly, seeing the measure enacted would be a source of pride for the Aquino administration. Efforts to reform the excise tax system on sin products have been frustrated in Congress for 15 years now.

But the bill was watered down. The version that the House of Representatives passed in June had been tweaked to consolidate proposed amendments from groups that were initially lobbying against the bill.

Better diluted than dead

The amended HB 5727 maintains a tiered system, but collapsed from 4 to 2 tiers for tobacco products (and 2 tiers for fermented liquors and 3 tiers for distilled spirits). Indexation will no longer be against annual inflation starting immediately, but a fixed 8% every 2 years starting 2015.

The projected revenues for the first year have thus been cut to practically half, at P31 billion, according to DoF Assistant Secretary Teresa Habitan.

Why did the bill’s proponents compromise?

Abaya said if they didn’t, the bill would have been dead in the water at the committee level. The committee is “the battleground.”  It is where “lobbying is strongest and most effective,” noted Abaya. “We had to find a middle ground to get it out to the plenary.”

Two factors were crucial in passing it. One, President Aquino threw his weight behind the bill, certifying it as urgent. Two, the bill’s proponents were able to get the “swing votes” of lawmakers belonging to the Nationalist People’s Coalition (NPC).

NPC, the political party of businessman Eduardo “Danding” Cojuangco Jr, chairman and former major shareholder of diversified conglomerate and alcohol beverage maker San Miguel Corp, as well as the so-called Northern Alliance in the House—a bloc of congressmen from tobacco-growing provinces in Northern Luzon—tried to shoot down the bill.

But NPC had a change of heart after the last-minute compromise on the bill, giving it the historic breakthrough.

More changes for alcohol

Strong lobbying by the alcohol and tobacco players has kept the excise tax system in the Philippines at status quo for decades.

Their arguments have been the same: that higher taxes will lead to lower consumption of their products, and affect the livelihood of thousands of farmers and workers dependent on them; that it would spur smuggling activities; and render local manufacturers uncompetitive against importers.

Abaya said much of the compromise to keep the bill going was made in the taxes for alcohol, not tobacco.

“Members of NPC were more concerned about alcohol, more than tobacco. It’s obvious.”

Unlike those who were championing the interest of the tobacco industry, Abaya said NPC members were willing to sit down with them and negotiate.

“Probably the cigarette group thought they could hold the line and there was no need for a sit-down because they thought they had the numbers. They were also counting on some guys they spoke with, whom we also spoke with.

“In the end, they had a much lower number compared to their original. Some of them didn’t even vote. They just resigned and maybe said ’talo na ito (this is a losing proposition), I don’t want to be identified with this losing thing.”

Non-negotiable provisions

Abaya, however, said that while they were willing to compromise on the tiers and the tax rates, they stood firm on “non-negotiable” structural changes in the excise tax system—the removal of the annex, and indexation of rates to inflation, which is totally absent under the current structure.

The annex Abaya was referring to is a provision under the law that classifies brands into old and new, with tax rates for the old brands based on 1996 prices, rendering them much lower than rates for the new. “These items are non-negotiable. The tiers, you actually have flexibility there.”

Nonetheless, Abaya said the approved bill is a milestone.

“The revenue issue is only secondary to the health benefits the bill will bring. It will discourage consumption among the poor and the youth,” he said.

Habitan agreed. “By making them expensive, we will prevent young people and the poor from affording these products. They’re not really social goods, they’re vice. We agree that people have the freedom to find their pleasure and these are not criminal pleasure. But nevertheless, they have negative externalities, health implications.”

Filomeno Sta. Ana, an economist and coordinator of Action Economic Reforms—a strong advocate of the sin tax bill that has been working with the DoF in the number crunching—said the amended bill is “a big improvement” from the current system.

“By merely removing the price freeze (annex), taxes will immediately go up,” he said. – Rappler.com

(Next: Taxing tobacco: ‘Gov’t still earns if the poor, youth buy less’)