P-Noy and tobacco taxes

P-Noy is a heavy smoker… but it doesn’t mean he is not supportive of pending proposals in Congress to reform our system of taxing tobacco and alcohol. In fact, I think he is convinced giving this reform measure his imprimatur to get it through Congress is a good use of his extensive reservoir of political capital.

I get the feeling P-Noy sees this debate over so called “sin taxes” in a totally different perspective. The current debate misses the point. It isn’t as if we want to punish the sinners among us, P-Noy included, with a higher tax.

What we really want to do is to make the sinners pay the right tax. As President, P-Noy will be the first to admit that these “sinful” acts of smoking cigarettes and drinking alcohol impose costs on the public purse particularly in terms of health services.

Taken another way, neither smoking nor drinking can be considered essential… indeed, both are more like luxuries.

If travel abroad is considered a luxury for which a travel tax is imposed to support the domestic tourism industry, an appropriate tax on tobacco and alcohol is pretty much along the same line. We can even make a stipulation that a significant portion of such a tax can be directly allocated to support public health services to help people with lung and other diseases related to smoking and drinking.

The “economic burden” due to health costs and productivity losses of only four smoking-related diseases is estimated at P148 billion-P314 billion yearly. What we want is simply to levy an appropriate tax on tobacco and alcohol to help society cover the public costs of using these products.

Fair is simply fair… even sinners should concede they must help pay for the consequences of their sinful behavior in pesos and centavos. They need not worry about time in hell because Senator Miriam says it doesn’t exist anyway.

And it is about time these sinners must pay more. The revenue yield from these “sin taxes” has declined by 37 percent since 1997 and now yields just 0.7 percent of GDP. In other words, the chain smoking sinners among us, P-Noy included, are no longer paying what they should rightfully pay to cover the social costs of smoking.

Why has this happened? First, thanks to a very strong and well funded lobby, the specific tax rates imposed on cigarettes have not been adjusted in line with inflation. Worse, the rates are based on 1996 retail prices for the older brands and that stifles competition. It has created a modern day tobacco monopoly in our country.

As a result, economists point out our tobacco tax rates as a percent of our domestic prices are among the lowest in Southeast Asia, well below those in Indonesia, Vietnam, and Thailand. That’s how powerful our tobacco monopoly is… it apparently has our officials in their back pocket to sustain this privilege.

Our prices for cigarettes are among the lowest for low- to middle-income countries. It encourages smoking and this addiction is specially bad for our young people. It is horrible that almost one-fifth of Filipinos begin smoking before the age of 10. Our country is also now the largest consumer of cigarettes among ASEAN countries (and 15th worldwide).

The emergence of a private sector tobacco monopoly where one company has 97 per cent of our cigarette market is not good for the country. This makes smoking unhealthy not just for our lungs but for our economy as well.

The monopoly works against tobacco farmers because just one company can dictate the price of their produce (monopsony). It is bad for consumers because there is no effective market check to prices (monopoly). And given the inelastic nature of the demand, addicted smokers here are pretty much screwed.

What should be done? 

Remove the essentially discriminatory provisions in our Internal Revenue Code as well as those provisions that have been proven prone to corruption. 

A good example is the multi-tiered classification system. Certain brands (like old brands) are given classifications, under which they would be paying lower taxes than they should otherwise be paying. The system deters competition because new brands are slapped higher tax rates.

It would be best to shift to a uniform excise tax rate for all cigarette brands and for each class of alcohol and index that to inflation. Doing away with the corruption-prone classification system and imposing a uniform tax rate for all, levels the playing field for old and new brands.

And we also ought to hike the tax rate. This will substantially increase the tax take from tobacco. It will also discourage consumption of tobacco by the poor, who are more sensitive to prices and least able to deal with the health consequences of the addictive habit.

But wouldn’t any increase in “sin taxes” adversely affect the poor tobacco farmers in Ilocos? Not really.

It may be surprising to many that Ilocos Sur Gov. Luis “Chavit” Singson favors the government-sponsored sin-tax bill. Singson said, it would level the playing field in local cigarette industry.

Singson, who owns a tobacco plantation in Ilocos Sur, said he decided to support the measure after Philip Morris Phils. Manufacturing Inc. (PMPMI) and Fortune Tobacco merged last year and created a virtual cigarette monopoly in the country. The price of a kilo of tobacco was reported to have fallen from P95 before the merger, to P73 after the merger, a 23 percent decrease

This is what Chavit said in a press conference at the Department of Health head office last Monday: “Pag hindi natin tinaas ang taxes lalo mako-kontrol ang presyo ng tobacco dahil magiging monopoly na ng mga manufacturer. Pero kung itataas pare-pareho ang taxes, marami pong buyers dahil patas ang labanan. Sa ngayon hindi patas. [Sila] ang nakikinabang, at parang taon-taon, nasasaktan ang mga local farmers dahil kino-control nila ang presyo.”

Thus, there is no need to worry about our tobacco farmers. On the contrary, reform may even bring them better prices because the new level playing field will encourage competition and better buying prices and end the monopsony that Philip Morris Fortune Tobacco Corp. presently enjoys in relation to the tobacco farmers.

For another, the reform bill pending in Congress provides for 15 percent of the revenues to be allocated to tobacco farmers to help them diversify their crops like what they did in Indonesia and Turkey.

One other thing that a successful reform of our “sin taxes” will deliver to the economy is an increase in government’s tax collection and this may be just the thing that will upgrade our sovereign rating to investment grade (the weak tax effort being the main constraint in an early upgrade of our sovereign rating). Such an upgrade will increase investor confidence even more and thus bring about more job creation.

There is also no basis to fear that any reform to index the tax rates to inflation will result in a higher price for cigarettes and encourage more smuggling. We now have the lowest prices for cigarettes in the region. The tax will only bring local prices closer to that of our neighbors.

In a milieu where money talks, the three branches of government have through the years seen things from the perspective of the powerful tobacco monopoly. It would take a President like P-Noy, one who is not afraid to tangle with vested interests to cut this tobacco monopoly down to size.

P-Noy has track record in this regard. We have seen how P-Noy didn’t flinch when he imposed the Open Skies policy even as the same interests behind the tobacco monopoly did all they can to stop him.

If for nothing else, P-Noy, the smoker, now has the opportunity to establish his credentials as the fearless national leader by getting his congressional majority to line up behind reforming our “sin taxes.”

The drunkard

Jose Villaescusa sent this one.

After a messy divorce, Jimmy goes back home to sort out his belongings. While rummaging in the garage, he comes across a box of whiskey.

He picks up an empty bottle, smashes it into the wall while swearing… “You’re the reason I lost my wife!”

He picks up and smashes another empty bottle… “You’re the reason I’m gonna lose custody of my kids!”

He picks up and smashes a 3rd empty bottle… “You’re the reason I’m gonna lose the house!”

He then picks up a bottle that was still sealed and full. He places the bottle gently to one side and says… “There there now my friend, stay aside...I know you were not involved...”

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco