Too high sin taxes may result in less revenue

I read only recently Senator Ralph Recto’s sponsorship speech on Senate Bill 3299, the Sin Tax bill, as reported out by the Committee on Ways and Means that he headed until recently, and I think he is unfairly being demonized by those who would mostly benefit from it. Finance Secretary Cesar Purisima, Health Secretary Enrique Ona, and Internal Revenue Commissioner Kim Henares criticized Recto for paring down the projected income from the very high taxes on cigarettes and liquor from P60 billion to only P15 billion. The combined pummeling forced Recto to resign the chairmanship of the committee. Sen. Franklin Drilon took over the position.

I understand why Purisima, Henares and Ona were dismayed at the Recto version of the bill (the House of Representatives has already passed its own version.) The main job of Purisima and Henares is to raise funds for an always-hungry government; Ona’s department will get 80 percent of the proceeds from the sin taxes, an amount that Budget Secretary Florencio Abad said may be too much for the Department of Health to absorb. On the other hand, the Committee on Ways and Means bears the burden of thinking of ways to earn more money for a greedy government which, like the giant who forces (by shouting “More! More! More!”) the goose to lay more and more golden eggs until it couldn’t lay anymore and died.

That was what Recto was trying to avoid. By taxing the cigarette and liquor industries too much, the government, like the giant, may kill these industries.

The justification for the big jump in sin taxes is that cigarettes and liquor are bad for the health. The government reasoning goes like this: By raising the prices of cigarettes and liquor “high enough,” people will stop smoking and drinking, thus saving their lungs and livers.

False. Raising prices will not make smokers and drinkers quit. While most drinking is a vice, smoking is not. It is already an addiction. Although many smokers want to quit, they cannot. Their bodies crave for the nicotine. So like a drug addict, they will go to all sorts of ways to get money for a nicotine fix, even if that means reducing the food budget for their families. And like a drug addict, they may even resort to selling family belongings or even go down to stealing in order to get money to satisfy their craving for nicotine.

The solution is not to severely tax the “sin products” but to ban them completely, said Recto in his report.

“If the social injury they cause is greater than the tax they contribute, then government should stop asking money from those who pack cigarettes and bottle the six-pack and should instead tell them to pack up and go,” Recto said in his report.

“There is policy incoherence,” he added, “in calling sin products cancer-causing and yet demand a higher cut from their sales and justify that share as an anti-cancer tax.”

Ban drinking and smoking totally? Impossible, as the failed Prohibition in the United States shows. The truth is that through the years “taxing cigarettes and liquor has always been the easiest way for a government to get a fiscal high, so it was often done, the justification being that when one pays for smoking or gulping (liquor) is more of a fine than a tax…

“The reality is that we have a government that is addicted to cigarette tax. It needs the fiscal equivalent of a nicotine fix. If we ban cigarettes, this government will weaken from lack of cigarette taxes. That would be the real fiscal shock,” Recto said.

There would be another fiscal shock. That is when revenue from cigarettes, after initially increasing, gradually decreases so that government would get less than what it was getting before the tax rates were increased. Why? Because of smuggling. That has been the experience of other countries like Singapore, Malaysia, Australia and Indonesia that also raised cigarette taxes too much. Even New York, which is supposed to have the best police force in the world, was no match for the smugglers.

What more of the Philippines with its many islets and isolated beaches, perfect landing points for smugglers, and a Coast Guard whose watercraft cannot catch up with the fast kumpits of smugglers? Not to mention an incompetent and graft-ridden Bureau of Customs (BOC) that cannot stop smuggling in huge container vans in broad daylight. They should have first asked the BOC if it could stop cigarette smuggling. But there’s no need for an answer; it cannot.

The equation is simple: When cigarette prices are too high in any given place, smugglers come in with their lower-priced cigarettes because they do not have to pay any taxes. And smokers, instead of quitting, will just buy the cheaper smuggled cigarettes that the whole Philippine government cannot stop from coming in. Result: The cigarette companies would be able to sell less of the expensive, tax-paid local cigarettes and therefore the government would collect less revenue. It would be the foreign cigarette factories and the smugglers that would benefit from the high taxes we would impose. Remember when cigarettes were being smuggled in plain sight in Cavite, and smuggled cigarettes were being peddled in every street corner? That will happen again if the government does not temper its greed.

“The danger of pushing taxes too high is that it may reach a point of diminishing tax returns,” Recto warned. “As in any product, a higher tax rate does not automatically result in higher collections.”

Worse, it may lead to the extinction of the local cigarette and tobacco farming industries, so that the government, instead of getting a little, eventually gets nothing.

Raise taxes on “sin products” all right, but not too much as we may kill the goose that lays the golden egg. Let us not be as greedy as that giant.