‘Sin tax’ reform bill will encourage smuggling

Sometime ago, I wrote against the proposed “sin tax” bill that would increase the excise taxes on cigarettes and liquor, driving their prices up to as much as 1,000 times the present prices. Of course, the excuse of those pushing the bill is that cigarettes and liquor are bad for the health and the high prices will discourage their consumption.

That is also the handy excuse of other countries that raised their excise taxes on cigarettes and liquor. But that is not the real reason. The real reason is greed. The government simply wants to squeeze more money out of taxpayers.

But it did not turn out the way they said it would. Consumption did not diminish; on the contrary, consumption increased. Also, while the revenue from the sin taxes increased in the beginning, it fell drastically later. Why? Because of smuggling.

That process is as sure as the sun rises in the east in the morning and sets in the west in the evening. When the price of any product rises excessively, smugglers bring in cheaper products. They can afford to sell cheap because they are not paying any taxes. So instead of discouraging consumption, the very high prices actually encourage it because the smuggled products are very cheap.

You remember the time when you can buy smuggled cigarettes at any street corner in the Philippines and the smugglers became filthy rich? You want to bring that kind of lawlessness back?

I have not changed my view on the sin tax bill and what it would do to the country. But in the interest of fair play, I will quote here from a letter sent in response to that column.

The proposed measure, House Bill No. 5727, was authored by Rep. Joseph Emilio Abaya of Cavite. (Is it only coincidence that Cavite was also the center of operations of the cigarette smuggler I mentioned earlier? Does it mean we are in for another wave of cigarette smuggling?) It is strongly supported by the Department of Finance (DOF). But of course. It would mean more taxes collected by the DOF whose main purpose is to raise revenues for the government. The measure of success of the secretary of finance is how much money he raised.

The proposed sin tax reform measure, according to the DOF, will dismantle the annexes and price classification freeze of certain brands of cigarettes, which “protect the market shares of existing companies at the expense of public health.”

Public health, my eye! There is no provision in the Abaya bill at all to discourage smoking and drinking. They just say the high prices would discourage consumption.

It doesn’t work that way. Smoking and drinking are addictions, like smoking pot or taking prohibited drugs. It is very difficult to stop this addiction. Many have tried but failed.

Merely raising prices won’t stop them from smoking or drinking. They will find ways to get money to go on with the habit, maybe reduce the food for their children, or stopping some of them from going to school. Or maybe they will steal, as some drug addicts do.

The proposal of former Health Secretary Esperanza Cabral to put graphic photographs of smokers with lung or mouth cancer on the packs of cigarettes should scare some of them into stopping smoking, and I don’t understand why this was not implemented.

Let’s go back to the letter: “Way back in 1996 when Republic Act 8240 was enacted, taxes due from tobacco and alcohol products on net retail prices [were] frozen. The products sold as low-priced cigarettes at that time that eventually have been repackaged as premium-priced cigarettes continue to be taxed as low-priced. New entrants in the market, meanwhile, are taxed according to their current net retail price. In other words, there is a lack of level playing field.”

The DOF said that a survey conducted by the Bureau of Internal Revenue (BIR) in late 2010 showed this discrepancy in the case of Winston FK, SP and GD American Blend Charcoal Filter, with the former being an “old brand” and the latter a “new brand.”

The BIR said Winston was sold at P22.93 per pack, and American Blend, at P23.60. The price difference is less than P1, but data will reveal that Winston was taxed only P7.56 per pack, while American Blend had a higher rate of P12.

The DOF clarified that removing the brackets and price classification freeze would not disadvantage locally produced cigarettes over imported ones as there was no provision in the bill creating such a distinction.

As to distilled spirits, the DOF reiterated that the excise tax reform was necessary “to comply with the ruling of the World Trade Organization,” and that the reform measures would not only result in higher revenues for the government but would improve public health services for the Filipinos as well.

Recently, former finance and health secretaries signed a manifesto to support HB 5727. Among the signatories were former Secretaries Margarito Teves, Ernest Leung, Ramon del Rosario Jr. and Roberto de Ocampo (all of finance) and former Secretaries Jaime Galvez-Tan, Esperanza Cabral, Juan Flavier, Alberto Romualdez Jr. and Alfredo Bengzon.

Listening to their arguments, I concede there is no question about the intention. There remain, however, questions on issues about the risk it would impose on the local industry, particularly on employment, the prices of products in the market, and whether it would indeed increase revenues and at the same time reduce the smoking incidence. In the experience of some countries that also raised taxes, results show otherwise: Revenue did not increase and in fact decreased, and consumption did not decrease but, on the contrary, actually increased.

Learn from the lessons of others.