[OPINION] How lawmakers gifted themselves with tax cuts on luxury cars

JC Punongbayan

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[OPINION] How lawmakers gifted themselves with tax cuts on luxury cars
By passing a law that makes expensive cars cheaper rather than costlier, our lawmakers not only weakened the promise of TRAIN, but also benefitted the wealthy at the expense of the Filipino people

After more than a year of torturous debate, TRAIN – or Tax Reform for Acceleration and Inclusion – has finally left the station.

There’s a lot to unpack in the new law. But at its heart lie lower personal income tax rates, offset by higher excise taxes on products like petroleum, tobacco, sugary drinks, and automobiles. (READ: EXPLAINER: What’s inside the bicam-approved tax reform bill?

By and large, the law is viewed as a step in the right direction, albeit causing some pain in the short run due to higher inflation. (READ: Will tax reform really hurt the poor?)

But most people probably don’t know that lawmakers were able to insert in TRAIN tax cuts on luxury cars. These cuts will inexorably benefit the wealthy – themselves included – and this could derail some of TRAIN’s original objectives. 

Excise tax on automobiles

TRAIN originally aimed to levy low taxes on cheap cars and high taxes on expensive cars. 

The reason is twofold. First, we need a more progressive taxation of cars, so that richer car buyers will pay higher rates than the rest of us. Second, the revenues will be earmarked to fund projects that aim to abate urban congestion and pollution. 

Table 1 summarizes the proposed changes. The original proposal of the Department of Finance (DOF) (3rd column) features a doubling of both fixed and percentage taxes compared to the current law (2nd column).

  Current law
(NIRC, RA 8424)
Original DOF proposal New law (TRAIN, RA 10963)
Up to P600,000 2% 4% 4%
More than P600,000 up to P1.1 million P12,000 + 20% in excess of P600,000 P24,000 + 40% in excess of P600,000 10% (more than P600,000 up to P1.1 million)
More than P1.1 million up to P2.1 million P112,000 + 40% in excess of P1.1 million P224,000 + 80% in excess of P1.1 million 20% (more than P1.1 million up to P4 million)
More than P2.1 million P512,000 + 60% in excess of 2.1 million P1.024 million + 120% in excess of 2.1 million 50% (above P4 million)

Table 1. Note: values in Php

But the DOF proposal was hardly reflected in the final version of TRAIN: The 4th column in Table 1 shows that it includes only percentage taxes, and no fixed taxes. Moreover, percentage taxes for cars above P600,000 are even lower than before.

This is touted to be a “simpler” tax scheme, and therefore easier to collect. Strictly speaking, this is also a “progressive” tax in the sense that tax rates increase with car prices. 

But if we look closer, this seemingly progressive scheme in TRAIN actually has the regressive effect of making expensive cars cheaper (and cheap cars more expensive) than before. Rich car buyers, more than anyone else, will stand to benefit from such tax cuts. 

Regressive impact 

Figure 1 shows the changes in the effective tax rate on cars of different prices. As you can see, there’s a yawning gap between the original proposal and the final law. 

The blue line (original DOF proposal) shows that the more expensive a car, the larger its tax hike. But the orange line (TRAIN) shows that expensive cars – specifically those ranging from P1.7 million to P4 million, and those P7.5 million and above – will actually be levied lower taxes than before. 

For example, cars costing P4 million will have a whopping 21% tax cut under TRAIN. But in the original proposal, they would get a 41% tax hike instead.

Figure 1. Note: NMP (net manufacturer’s price) is different from SRP (suggested retail price) which includes profit margins

Where does this huge disparity come from? The answer lies in the respective versions of TRAIN passed by the House of Representatives and the Senate.  

Figure 2 shows the auto tax provisions passed by the House (green lines) and the Senate (red line).

Figure 2

The House enacted a two-tranche auto tax, featuring tax hikes in 2018 and even larger tax hikes in 2019. Although not quite the same as DOF’s original proposal, the House bill at least moves in the same direction. 

But the Senate version goes completely the opposite way: Cars costing P1.65 million and more will all have tax cuts, and these increase with a car’s price.  

So instead of making expensive cars more expensive (and making rich car buyers pay more), senators want to make expensive cars a lot cheaper (and rich car buyers pay less). 

Christmas gift…for the wealthy

It appears, therefore, that the final version of TRAIN was some sort of compromise between the House and Senate versions (in Figure 2, this is visualized by the orange line lying in between the green and red lines). 

Who’s responsible for this? It’s hard to say. But one could suspect this was the brainchild of senators, who pulled down the tax rates, converted them from tax hikes to tax cuts, and ended up passing a patently regressive auto tax. Senators have much explaining to do.

The winners from this sneaky move are clear: Importers  and luxury car buyers, who often include lawmakers themselves, as testified by the Land Cruisers, Lamborghinis, and Ferraris paraded by the legislators and their kin.

Meanwhile, ordinary Filipinos will face higher taxes for the cars they can afford. A recent TopGear  article (based on the analysis made by the think tank Action for Economic Reforms) summarized the expected price changes for popular models like the Toyota Vios, Mitsubishi Mirage, and Honda City. 

One can argue that a higher tax on these popular models – and the resulting reduction of sales – could help stem the unbridled growth of vehicle ownership which contributes directly to our daily Carmaggedon woes. Toyota already projects “there will be no growth in terms of sales” in 2018; Suzuki foresees a sales reduction of 5% to 10%.

But a progressive tax on cars was supposed to help make TRAIN more equitable. By passing a law that makes expensive cars cheaper rather than costlier, our lawmakers not only weakened the promise of TRAIN, but also benefitted the wealthy (including themselves) at the expense of the Filipino people. 

Let’s pay more attention to the lawmaking process

When President Rodrigo Duterte signed TRAIN on December 19, it was tagged as the administration’s “best Christmas and New Year’s gift” for the Filipino people.  

But as we’ve shown in this article, lawmakers also managed to gift themselves with revisions of the auto tax that run counter to the original purpose of TRAIN. 

Perhaps this a wake-up call for us all to pay closer attention to the details of the lawmaking process. The clincher for the auto tax was the bicameral conference committee, where much of the legislative “magic” usually happens. 

Bothering with the lawmaking processes is admittedly a laborious task, and most Filipinos will be too busy with their everyday lives. 

But the laws Congress makes impact our daily lives in a very real way, and TRAIN was no exception. The least we can do is to pull back the curtain, engage our lawmakers, and hold them accountable for their actions (say, by contacting our representatives or posting about their errant ways on social media).  

Half-baked reforms are no reforms at all. To achieve bold reforms instead, we better step up our engagement in the political process, however difficult that may be. Otherwise, we will continue to be unwitting victims to our lawmakers’ dangerous, self-serving tricks. – Rappler.com

The author is a PhD candidate at the UP School of Economics. His views are independent of the views of his affiliations. Thanks to AJ Montesa (Action for Economic Reforms), Kevin Mandrilla, and an anonymous friend for very useful comments and suggestions. Follow JC on Twitter: @jcpunongbayan

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for Rappler.com. He is also co-founder of UsapangEcon.com and co-host of Usapang Econ Podcast.