Oil tax dilemma
President Duterte is faced with a tricky problem, and any decision he makes will please some and discomfort others.
Should he insist on an earlier pronouncement that the scheduled increase in excise tax on petroleum products on Jan. 1, 2019, be suspended?
Or will he backpedal and say that the increase will proceed as scheduled because of the recent steep drop in global oil prices?
When inflation unexpectedly surged to nine-year highs last September, the government had to think of ways to ease the burden of soaring consumer prices on the public.
One of these measures was to suspend the scheduled increase in the tax on petroleum products like gasoline and diesel, as prices of these imported commodities were spiraling due to rising crude oil prices abroad.
This was the suggestion of President Duterte’s economic team in early October.
Fast forward to November, and crude oil prices began a surprising decline. Now that same economic team will recommend to President Duterte that the tax increase proceed as scheduled on Jan. 1, 2019, as mandated under the Tax Reform for Acceleration and Inclusion (TRAIN) Act.
Following the meeting last week of the Cabinet-level interagency Development Budget Coordination Committee (DBCC), Finance Secretary Carlos Dominguez III explained that the recommendation was triggered by the favorable outlook in world oil prices.
The benchmark Dubai crude oil price has gone down by 14 percent from an average of $79 a barrel in October to $68 thus far in November. The oil futures market projected the price of oil to decline further to below $60 a barrel in 2019.
The economic team also considered the implication on revenues and expenditures for 2019 should the government proceed with the
suspension of the increase in excise taxes on petroleum.
The estimated net revenue loss is P43.4 billion for a 12-month suspension, assuming Dubai crude price averaged $65 a barrel in 2019. The erosion in revenue will lead to a commensurate decrease in government expenditures, according to Dominguez.
The economic team pointed out that the suspension of the second tranche of excise tax increase on petroleum was intended to curb
inflationary pressure.
With month-on-month inflation moderating due to supply-side reforms coupled with falling petroleum prices in the world market, the DBCC thinks the suspension has become unnecessary.
The DBCC now expects the Dubai crude price to drop to $60-$75 a barrel next year, down from the previous assumption of $75-$85 a barrel.
Budget Secretary Benjamin Diokno said that, based on the Bangko Sentral ng Pilipinas’ computation, inflation would already be within the target range of 2-4 percent next year even with the second tranche of fuel excise tax increase.
Under the TRAIN law, an excise tax of P2.50 a liter was slapped on diesel and bunker fuel starting this year. This will go up to P4.50 in 2019 and P6 in 2020. The excise tax on gasoline also increased from P4.35 a liter to P7 in 2018, to P9 next year and P10 in 2020.
Dominguez said the earlier recommendation to suspend the scheduled oil excise tax increase was “based on circumstances at that time.” The economic team would be doing the President a disservice if it did not bring these recent developments to his attention, he added.
On the other side of the fence are the politicians who remain wary of the potential consequences of the new tax increase. Sen. JV Ejercito has urged President Duterte and his economic team “not to walk back on their decision to lighten the load off the purchasing power of Filipino families.”
Now that consumers have breathed a little, he said the government should not slap them with a new round of taxes that would once again push up the prices of basic commodities.
It will be ultimately up to the President to decide on the matter when the Cabinet meets on Dec. 4.
Any resulting price increase will be a fresh burden on the people (not to mention a negative for administration candidates in the coming elections), but disregarding the advice of his economic managers will also crimp the government’s finances.
A solution that takes into account and balances all these urgent concerns is badly needed.
