Revisiting the Sin Tax Law

AFTER YEARS of debate, Congress finally ended the deal with “sin taxes” by enacting the Sin Tax Law on December 2012. The law imposes additional ad valorem taxes, among other specific taxes, on top of existing excise and value-added taxes on different kinds of tobacco products and alcoholic beverages. Naturally, the legislation drew staunch opposition from sellers and buyers of the said products.

The objectives of the Sin Tax Law are three-fold: promoting better health outcomes by discouraging consumption of alcohol and tobacco, raising much-needed revenues to fund the government’s health programs, and simplifying the tax structure for alcoholic and tobacco products.

Smoking-related diseases such as lung cancer are a burden not only on the health system, but also on overall public welfare. Heavy consumption of tobacco products is inextricably linked with the growing number of people who suffer from lung cancer, among other forms of cancer for which smoking is a risk factor. According to the Department of Health (DOH), the Philippines has an estimated 17.3 million tobacco consumers, the largest number of smokers in Southeast Asia. It comes as no surprise, therefore, that lung cancer is the leading form of cancer in the country. Furthermore, DOH data reveal that ten Filipinos die from smoking-related causes every hour. Alcoholic beverages, meanwhile, are relatively milder, health-wise, than smoking. But alcohol consumption does pose a number of social costs including vehicular accidents, violence, and crimes.

Given the above, the Sin Tax Law aims to promote a healthy lifestyle by discouraging the consumption of tobacco and alcohol. These products are known to have adverse effects on the health and welfare of its primary users and even more so for secondary users. Sin taxes, therefore, will help induce consumers of these products to reduce their consumption, if not quit altogether. More importantly, higher prices through taxation will help prevent others, especially the youth, from starting on these vices.

This leads to another objective of the Sin Tax Law, which is to increase government revenues that could then be used to augment funding for the country’s struggling universal healthcare program. The said program includes medical assistance for those in need and the enhancement of poorly-equipped government health facilities. The last objective of the law is to simplify the tax structure of the above-mentioned products and remove the price- or brand-classification freeze. This involves a shift from a multi-tiered tax structure to a single tax structure, an automatic annual adjustment of tax rates using relevant tobacco and alcohol indices established by statistical authorities, and finally, a proper tax classification of alcohol and tobacco products that will be determined every two years. The said shift, however, is to be implemented gradually and is set to be completed by 2017.

So, has the Sin Tax Law achieved its desired objectives? Bureau of Internal Revenue (BIR) Commissioner Kim Henares reported that for the first 11 months of implementation of the law, a total of PhP91.6 billion has been generated from taxes imposed on alcohol and tobacco, exceeding the full-year collection target of PhP85.86 billion. The amount is also 81.5 percent higher than the collection of PhP50.4 billion during the same period in 2012.

The bulk of total sin tax collections or 80 percent would be allocated for the universal healthcare program, specifically under the National Health Insurance Program that targets the attainment of health-related Millennium Development Goals, as well as health awareness programs. The remaining 20 percent will be used to enhance health care facilities. DOH Undersecretary Ted Herbosa noted that the government allocated PhP84 billion for the DOH in 2014, an increase of 58 percent from the 2013 budget and the highest so far in the history of the department. Of the incremental revenue collections from tobacco products, 15 percent would be used to fund programs to promote economically viable alternatives for tobacco farmers and workers.

As to whether the law has been effective in curbing smoking and alcohol usage, a consumer study conducted by AC Nielsen shows that smoking prevalence dropped from 52 percent to 46 percent for smokers aged 20 to 44 years old for the first half of 2013. BIR data also showed a reduction in the volumes withdrawn from plants for tobacco and fermented alcohol products from January to November 2013 by 16.97 percent and 12.18 percent, respectively. Withdrawn volume for distilled drinks, however, increased by 26.04 percent. Civil society groups agree that it is still too early to gauge the effectiveness of the law, but with continued annual increase in the tax rates, many are expecting that the evidence will show in the future.

In sum, the Sin Tax Law shows great promise as an effective mechanism for reducing tobacco and alcohol consumption as well as being a successful policy for generating revenues. The World Bank hailed the reform measure as a “win-win” piece of legislation for the Philippines. That being said, the government and the public should keep an eye out for developments that can affect the progression of this law. Foremost would be the issue of smuggling or the availability of illicit products in the domestic market, as well as making sure that the revenues collected would be properly spent and used towards the avowed objectives.

The Institute for Development and Econometric Analysis (IDEA), Inc. is a non-stock, non-partisan institution dedicated to high-quality economic research, instruction, and communication. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the organization. For questions and inquiries, please contact Remrick Patagan via ideainc.mail[@]gmail.com or telefax no. 920-6872.

source:  Businessworld