Tax reform for a healthier, competitive society

The highly successful 45th annual meeting of the Asian Development Bank in Manila, with record attendance by global financial leaders, is yet another indication of renewed interest in the Philippines and our bright economic prospects. Not since the Ramos years have our prospects been viewed so positively not only by the Philippine business community but also by a growing list of global financial institutions and multinational companies. This renewed interest is based largely on the strong trust and confidence enjoyed by the Aquino administration due to its highly credible crusade for good governance and the leadership provided by President Aquino and his highly professional and credible Cabinet.

As the President said in his keynote speech during the event, all efforts are being exercised by the government to send the message that the Philippines is open for increased investments from both local and international firms. He greatly underscored the value of what he called the Philippines’ greatest asset—its people—and the role that the citizenry would play in ensuring that the country has a productive economy anchored on a solid workforce.

To seize the golden opportunity to move our country to a higher economic growth trajectory, however, certain elements need to be in place. Primary among these is the need to put our fiscal house on a stronger footing that will support the needs of a rapidly growing economy. It is in this context that the Makati Business Club is advocating urgent action by Congress on bills to reform excise taxes on tobacco and alcohol products, which also will have a significant impact on critical health concerns currently facing our nation. Indeed, such proposed measures have been met with fear and praise coming from both sides of the argument, both presenting valid views. After study and consultations with various stakeholders, and taking into account the benefits such changes would bring, MBC issued a statement in support of these “sin tax” reforms this week, which I quote in full:

“The Makati Business Club welcomes the initiative to reform excise taxes on tobacco and alcohol products, which would allow the government to optimize its revenue potential and create a strong disincentive for excessive tobacco and alcohol use.

“We especially support the restructuring of the excise tax system from a multi-tiered structure to a unitary excise tax structure for tobacco and alcohol. This will effectively improve equity across cigarette and alcohol brands, promote market-based pricing in the industry, and encourage the entry of legitimate competition. It will also demonstrate the country’s commitment to open and fair competition, as well as its respectful compliance [with] international agreements.

“We further push for the elimination of the price classification freeze so the government is free to levy competitive excise tax rates on tobacco and alcohol products. We believe that the current system has eroded the tax base, costing the Philippine government a substantial amount of foregone revenue. To address this loophole, we urge lawmakers to raise the excise tax rates and burden of tobacco and alcohol products, taking inflation into account yearly, to adequately reflect the negative externalities of consuming these goods.

“More importantly, MBC joins the medical community in expressing concern over the increasing number of smokers among our youth; the large percentage of preventable deaths and disabilities due to smoking-related diseases; and the fact that the Philippines is the 15th-largest market for tobacco in the world, with one of the lowest taxes imposed on tobacco products. The flawed tax structure governing tobacco and alcohol products has allowed the abuse of their consumption and has failed to curb the growth of new smokers and drinkers, particularly from the youth and the poor. It is the society that carries the burden, as evidenced by the annual increase of economic and productivity losses tied to excessive drinking and smoking.

“In response to some sectors’ fear that the resulting higher prices of tobacco and alcohol products will encourage black markets, MBC urges the government to further strengthen its campaign against smuggling and the trading of illicit goods. We firmly believe that strict implementation of customs laws and regulations, and effective anti-corruption efforts in customs and border control, are still the key elements in winning the war against smuggling. The fear is valid, but it should not deter the government from imposing correct excise tax rates, nor should this be made an excuse to nurture anti-competitive policies and practices.

“Lastly, we propose that the government utilize portions of additional revenue from excise tax collections for promotional and educational activities on the dangers of smoking and drinking, as well as allot a substantial share of the revenue for the Philippine healthcare program. We also recommend that the government expand its technical and financial support for Filipino farmers.”

Ramon R. del Rosario Jr. chairs the Makati Business Club. E-mail comments to rrdelrosario@hotmail.com.