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Opportunities from the Tobacco Tax Inclusion in TRAIN
Posted by Action for Economic Reforms | Feb 26, 2018 | Columns, Fiscal Policy, Sin Tax Reforms, Tax Justice, Yellow Pad
By Arjay Mercado
One unexpected development in the passage of Republic Act (RA) 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law was the last-minute addition of a tobacco excise tax increase. Health advocates were surprised by this sudden inclusion because neither the House version nor the Senate version of the bill included such a provision. Many feared that this could have adverse effects on the economic and health gains obtained from the Republic Act (RA) 10351 or the Sin Tax law of 2012.
A crucial point of contention is that the newly legislated tobacco tax rates are lower than the rates proposed in the bills of Senator Manny Pacquiao and Senator JV Ejercito. The bill of Senator Pacquiao proposes to increase the tobacco excise tax by at least 100% in 2018 and raise the succeeding annual increases from 4% to 9%. The Ejercito bill contains a higher tax rate, by tripling the rate from P30 in 2017 to P90 in 2018.
Health advocates support these proposals because they, with the Pacquiao bill as example, will prevent one million Filipinos from smoking by 2022.
However, the approved tobacco excise tax in the first package of TRAIN has increased the rate by P5 or 17% in 2018 (P2.50 in the first half and another P2.50 in the second half), followed by a series of lower rate increases until 2024. After this period, the annual 4% increase mandated by RA 10351 becomes operational again (see table).
Various Tobacco Tax Proposals and their Health and Revenue Impacts
Tobacco Excise Tax Proposals Additional Revenue per Year
(average for 2018 to 2022)
Additional Revenue for 2018
Impact on Number of Smokers
RA 10351 (Sin Tax Law of 2012):
2018: P31.2 per pack
2019-2022: 4% annual increase
P21 billion
P3 billion
1 million MORE smokers by 2022 (average of 200,000/year)
RA 10963 (TRAIN Law of 2017)
MORE smokers by 2022 (average of 100,000/year)
HB 4144:
NRP of P11.50 and below: P32 per pack
NRP above P11.50:
P36 per pack
2019 onwards: 5% annual increase
SB 1599:
2018: P60 per pack
P105 billion
smokers by 2022 (average of 320,000/year)
*Relative to estimated revenue for 2017
** Relative to projected smoking prevalence for 2017
Source: Diosana and Dans, 2017
Aside from the low rates approved for the next few years after 2018, some are disappointed that the opportunity to pursue changes to replace the lower rates might no longer come. They fear that the legislators will use the new law as an excuse not to approve any further rate increases in the short and medium terms.
I would like to argue, however, that the inclusion of the tobacco tax in package 1 of TRAIN is actually a victory for health, though a modest one.
First, the approved rate has retained the unitary system. Reverting to a two-tiered system (as stated in House Bill 4144 that the House approved in 2016) would have resulted in lower cigarette prices, lower revenue, and a bigger administrative burden, borne out by the sad experience prior to the passage of RA 10351.
Third, while not on a par with the Pacquiao and Ejercito proposals, the approved rates in TRAIN are still higher than status quo (retaining what RA 10351 mandates).
And the most important point is that the rate increase in 2018 is quite significant, equivalent to a 17% increase. It definitely makes tobacco less affordable. This meets the health objective at the same time that such an increase will provide considerable new revenue, of which a big portion will continue to be earmarked for health.
Besides these gains, the unfinished TRAIN process still provides an opportunity for health and economic reform advocates to continue pushing for higher tobacco taxes in 2019 and beyond.
For one thing, there remains a compelling need to increase the tax effort. The revenue target of the Department of Finance (DoF) from TRAIN has not been met because of the compromises in package 1. The final version of the tax reform law is only expected to generate P90 billion, as opposed to the original goal of P140 billion. As a relatively popular tax, the excise tax on tobacco is a viable and effective option for DoF to boost the revenue yield. Finance Secretary Sonny Dominguez has expressed his position to increase the excise taxes for alcohol and tobacco products.
Also, one of the priority pieces of legislation of the Duterte administration is the Universal Health Care (UHC) Bill. The UHC Bill will expand the coverage of the country's health insurance system and will significantly reduce the out-of-pocket expenses of Filipinos on health services. For this bill to materialize, however, the government will need a minimum of P90 to P100 billion every year. The estimated P50 to 60 billion from the Pacquiao or Ejercito bills will be the main source to realize this.
The year 2017 proved to be a difficult year for tobacco control advocates. The industry-backed lobby is stronger than ever as proven by how a weak bill was railroaded in the House in late 2016.
However, the next stage of TRAIN provides an opportunity for reformers. Whether one sees TRAIN as an obstacle or a gain to health, one thing is certain: The fight for a higher tobacco tax rate and a better universal health care system is far from over.
Arjay Mercado, a former student leader and a former student (with honors) at the University of the Philippines School of Economics, is the researcher of the Tax Team of Action for Economic Reforms.
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