The controversial House Bill No. 4144 which seeks to retain the two-tiered excise tax system on cigarettes is pro-revenue, according to a University of the Philippines (UP) economist.
“There is a need to modify the existing unitary tax system to a two-tier approach to preserve revenues derived from low-income consumers who constitute the bulk of cigarette consumption,” said UP-Manila Economic professor Dr. Ernesto R. Gonzales.
HB 4144 proposes a two-tier system with an excise tax rate of P32 per pack on cigarette packs priced P11.50 and below (low-end) and P36 for those priced higher (premium) and a 5 percent increase thereafter beginning 2018.
The London School of Economics-educated professor cited the concept of price elasticity where the rich sector of society tends to be less responsive to price increases than low-income consumers.
“A unitary system is inequitable because it essentially makes the poor or low-income sector devote a higher percentage of their income to paying the tobacco tax than higher-income individuals who can actually afford to do so,” he said.
“Besides, a unitary system impedes on consumers’ freedom to choose a product that suits his level of income,” Gonzales argued.
A study by Dr. Dahlia K. Remler, an expert on the issue health economics at Harvard University, said cigarette taxes had been found to be regressive for two reasons.
First, sales tax are generally regressive because the rich save and invest a large portion of their income than the poor, and so the poor spend a larger share of their income on consumption.
Second, since the prevalence of smoking is higher among the poor, cigarettes are in fact disproportionately consumed by the poor.
The two-tier approach will lessen the impact of the regressive tax as it tends to approximate the tax imposed on taxpayers based on their respective income levels.
In his explanatory note, Rep. Eugene Michael de Vera of the ABS Partylist argued that incremental revenue was expected to increase the government’s budget which may be used to fund more social and vital infrastructure projects.
The precursors of the current Sin Tax Law, House Bill No. 5727 and Senate Bill No. 3299, considered and provided for the two-tier approach which was eventually rejected.
The Aquino administration instead passed a unitary tax system into law thinking it would result in higher revenues.
However, Department of Finance data as of October 2016 showed a drop in excise tax collection by 13.30 percent.