High taxes won’t hike revenue or cut consumption

The Department of Finance has sent a bill to Congress raising the excise taxes on tobacco and alcohol, collectively called “sin taxes” because they are bad for the health. Smoking causes lung cancer and emphysema, and liquor causes cirrhosis of the liver. All of these ailments can be fatal. That is why tobacco and alcohol are the favorite whipping boys of governments that want to collect more taxes.

The excuse: High cigarette and liquor prices will discourage consumption and save more lives, and at the same time bring in more revenue for the government. That is why there is little protest from the public. Who can quarrel with such an argument?

Alas, it does not always end like that. High prices do not discourage smoking or drinking, which are addictions. Much as the individual wants to quit the bad habits, usually he is not successful. The craving must be satisfied; it is like an itch that must be scratched. Based on the experience of other greedy countries that raised excise taxes steeply, there is no correlation between high taxes and reduced smoking and drinking rates. The answer is not to hike prices but to provide an alternative to satisfy the nicotine and alcohol craving. And to prevent young people to start smoking and drinking, in the first place.

Very high taxes also do not result in increased revenue. On the contrary, they usually result in less revenue. Why? Because consumers turn to other cheaper sources like smuggling. This results in lesser production for local manufacturers and therefore they pay less taxes.

This has been the experience of Ireland, Singapore, Sweden, Malaysia, the United States (New York) and Romania. These countries imposed steep increases in excise taxes. The higher the price, the more the smuggling. Ireland, Singapore and Sweden had to freeze further increases to bring illicit trade under control, with strong enforcement measures. Malaysia, New York and Romania are today sad illustrations of how quickly illicit tobacco trade booms with sharp cuts in the affordability of cigarettes. In these markets, the tobacco black market accounts for 25-40 percent of cigarette consumption.

We should learn from the sad experiences of these countries.

The Philippines is like a paradise for smugglers with its porous borders. With so many islets and isolated beaches to land smuggled cigarettes, how can the government stop smuggling? Remember the time when smuggled blue-seal cigarettes were being sold by sidewalk vendors at every street corner and smugglers became filthy rich?

Note that the sin tax bill (HB 5727) introduced by Cavite Rep. Emilio Abaya will make cigarettes more expensive by over 1,000 percent. There will be no more high-priced and low-priced cigarettes. All cigarettes will have a uniform excise tax.

How did heavy taxation of cigarettes affect smoking rates?

I read a detailed report on Tobacco Excise Policy and Illicit Trade, Country Case Studies, 2010, and it is an eye-opener. Our legislators should read it.

The prevalence of smoking in Malaysia has grown from 43 percent (before a series of steep increases in excise taxes were imposed) to 55 percent in 2009.

Other countries generally retained their respective smoking rates after massive tax hikes, posting insignificant year-to-year variances. However, an antitobacco group, Towards a Tobacco-Free Singapore, decried the city-state’s smoking rate last year, stating that the National Health Survey conducted in 2010 indicates an alarming increase in the percentage of Singaporeans smoking cigarettes.

Only New York and Sweden have succeeded in reducing smoking incidence through high excise taxes. Sweden was able to reduce the smoking rate from 17.8 percent to 11.2 percent in 2008.

New York’s smoking rate dropped to 16.8 percent in 2009 from 21.6 percent in 2000—but at what price! With the typical cigarette pack costing $9 (P384.22), New York has become one of the biggest and most profitable targets of local and international smuggling. And it is reputed to have one of the most efficient and best-equipped law enforcement agencies in the world.

A study released in 2006 shows that New York loses more than $76 million a year to cigarette smuggling. Law enforcement officials are worried that the widening price gap between taxed and untaxed cigarettes will make the situation worse.

Admittedly, massive excise tax increases do lead to immediate increases in government revenue. But countries that did so subsequently experienced prolonged stagnation and decline in tax collections soon after.

The prevalence of smoking in the Philippines is estimated at 28.3 percent of the population, according to the Philippine Global Adult Tobacco Survey of 2009. Hoping to reduce smoking by raising the price of cigarettes is fantasizing and playing with the economy.

There is no certainty that taking the price route to lower the smoking incidence will work. The only certainty is that, like other consumers, smokers will seek alternatives and solutions to high prices. International experience shows that smokers will have no qualms patronizing cheap smuggled cigarettes.

But the government faces major obstacles in preventing smuggling in the Philippines. We are an archipelago with a very porous coastline—a veritable smuggler’s paradise. Match this with an underequipped and undermanned Coast Guard and a laughable record of the Bureau of Customs, and you get the sorry picture.

As for liquor, you know the sorry experience of the United States during Prohibition. Not only smuggling but also bootlegging increased, and not even the Untouchables could stop them.