MAPping the Future Column in the INQUIRER 8 October 2012

Final Copy

The Revised Sin Taxes on Tobacco Products:

A Bane or A Blessing?
by Anthony Alden Sy Aguilar

Asthma is no walk in the park. I've been having some very annoying asthma attacks over the
past few months - no thanks to the ridiculously erratic weather and the countless smoke-befogged
boardrooms and offices I've had to endure lately - and the doctor gave me a choice between the beach
or my room. Since I dread the thought of fighting the traffic and enduring a long drive to a decent
beach where I can have some peace and quiet, I've elected to stay home, crank up the airconditioner
in my room, read old pocketbooks and watch some DVDs. There is something to be said for
peaceful rooms free of noise, stress, and yes, cigarette smoke, the bane of every asthmatic's
existence.
All this talk about cigarette smoke, however, makes me think of the impending changes to the
excise tax law on alcohol and tobacco products. Any time Congress makes changes to our tax laws, I
get a little anxious, because Im concerned about how those changes are going to influence everyday
life and I say this from the standpoint both of a tax practitioner and a Filipino citizen. Now,
because the Pinoy likes to enjoy his beer and cigarettes, its not surprising that people are concerned
about how the new excise tax provisions will affect the prices of a cold bottle of beer and a cigarette.
Experience tells us, though, that every change to the countrys tax laws has the potential to be
a double-edged sword, and the only question is which side of the sword will cut through Juan dela
Cruzs daily life? In the case of the excise tax on cigarettes, this is definitely a double-edged sword
that would make the Toledo sword-makers sit up and take notice. So, lets take a gander at each side
of the blade, shall we?
I try to be a positive thinker, so lets consider the advantages of raising the excise taxes on
tobacco products. There are some very real benefits that could come about, and the first is that
smokers just might cut down on their consumption of cigarettes. Higher taxes mean that it'll cost
more to light up, and less cigarettes sold will mean cleaner air for everyone. That just might translate
into fewer days when my friends will come upon me wheezing like a car that badly needs a tune-up.
Still others will say that higher cigarette prices might discourage young people from
acquiring the habit its becoming a common sight to see teenagers smoking a stick or two outside
school buildings, between their classes. Smoking, it seems, is cool, and its a rather disturbing
truth that smokers are becoming younger and younger these days, raising the spectre of an entire
generation or two of Filipinos with crippling respiratory diseases. As a father myself, Im just glad
my two children wouldnt even come within a mile of a cigarette. Sadly, other parents arent as
lucky as I am, and Im sure that theyd welcome a rather sharp rise in cigarette prices in the hope that
their children will be put off from spending so much on a stick of rolled-up leaves!

Now, the tax practitioner in me can understand why the Government wants to raise the excise
tax rates on tobacco and alcohol products, because its a fact that for many years now, cigarette
companies haven't had to address higher taxes. This is, either way you look at it, unfair to other
industries that have seen higher tax rates over the passage of time, and its easy to see why the
Government has been working to remedy this situation. Economic development is always best
achieved when theres a level playing field for all industries, and when every sector bears as much
as possible an equal share of the responsibility to support national development.
Some cynics would say that the Government is raising excise tax rates not so much to level
the playing field, but to raise revenues from a particularly lucrative industrial sector after all,
millions of Pinoys can be seen puffing away in all kinds of places, from the street corner to the
corner office. But then, one cant argue with the need to raise taxes, which as we all know are
absolutely necessary if were going to uphold such things as peace and order, health care, and so on
and so forth. Either way you look at it, you cant run a government on a shoestring budget, or expect
national development to come cheap. Everyone the smokers included has to pay his fair share of
taxes, and invest in the future of the country. Im especially gratified by reports that there are plans
to allocate excise tax revenues to health care programs, a particular sector of governance that I
personally think needs to be funded as generously as possible.
All of these considerations are excellent reasons for an increase in the excise taxes on
cigarettes. But like I said, raising tax rates can be a double-edged sword, and in the case of the excise
tax on cigarettes, heres the catch if things go according to plan, the new excise tax rates will raise
the taxes on tobacco products so dramatically that the price of cigarettes will surely hit stratospheric
levels. And the cigarettes Im referring to are not those fancy imported cigarettes, but the cigarettes
that are locally-produced by cigarette manufacturers who employ local labor and make use of local
resources.
It doesnt take a Stephen Hawking to realize that if the price of local cigarettes goes up faster
than Iron Man at full throttle, there is bound to be an impact on the economy, and it will definitely
not be a good one. The first casualty will be the tobacco industry itself astronomical retail prices of
locally-manufactured cigarettes, which are by far the most popular and the most saleable cigarettes,
may well mean not only a reduction, but a nose-dive in the sales of these cigarettes. And if that
happens, then the Governments objective to raise revenues from the higher excise taxes will
ultimately be defeated.
Soaring cigarette prices may also open a particularly nasty can of worms. The rules of
economics remind us that prices for a certain item can be raised only up to a certain point, beyond
which consumers will cease to purchase that item and turn to lower-priced alternatives. And for
smokers, who simply have to have their nicotine fix one way or the other, the alternative to
exorbitantly-priced local cigarettes will be the much cheaper black-market cigarettes. While its
true that these black-market cigarettes arent available as yet! throughout the country, theres
nothing to stop the spread of these bootleg products across the country if the demand increases. And
if that happens, can the spectre of smuggling operations to bring in more and more of these blackmarket cigarettes into the country be far behind?
I dont mean to be a party-pooper here, I truly dont. Smoking is a health hazard, whichever
way you look at it. I also understand why the Government wants to adjust excise tax rates, and I can

definitely appreciate the fact that taxes need to be raised so that economic programs can be funded
and our country can continue to look forward to sustained development. But I do believe that some
thought has to be given to the spending habits of the Filipino consumer, particularly smokers. I
sometimes think that a smoker is a bit like a person whos a slave to fashion ever observe how
theyre so conscious of name-brands, and how they want to have all the hottest fashion
accessories? But not everyone can afford that new Hermes bag or the latest Panerai watch, so what
to do? I think we all know the answer to that, and why theres a proliferation of imitation designer
bag, shoes, watches, etc. throughout the metropolis something which I guarantee is very good for
the underground economy but very bad for legitimate, tax-paying businesses.
If people can patronize these imitation designer items, its not a stretch to imagine that
smokers, who absolutely have to support their habit, will resort to patronizing black-market
cigarettes, especially when you consider that theyre looking at a price increase of at least 700% for
the lowest-priced, legitimately-produced cigarettes. Smokers need their nicotine, and Im willing to
bet that when a stressed-out smoker reaches for a pack of cigarettes, hes not going to think about
whether taxes have been paid on the cigarette he's about to light. Smokers who consume just one or
two sticks a day may not be unduly affected by escalating cigarette prices, but those who consume
one to two packs a day and there are many of them will surely feel the pinch, and it is a very
distinct possibility that theyll resort to black-market cigarettes just to make sure that they can meet
their daily consumption of tobacco.
The long and short of it is that any change in tax rates will have an inescapable impact not
only on the economy, but on peoples lives and their quality of life, and this is something that public
finance planners should take into consideration whenever an attempt is made to significantly raise
taxes that will affect a particular sector of the economy. Taxes at least in the 21st Century! are
intended to provide the Government with the resources to sustain the economy and improve the
overall quality of life of the people. They should not be imposed, therefore, at the risk of
encouraging the underground economy and fostering unhealthy consumption habits that may pose
threats to the health and well-being of the people.
"Sin taxes got their moniker because they were supposed to ultimately benefit the nation by
discouraging people from patronizing products and goods that could be detrimental to their health
and welfare. In this case, however, whether the revised sin tax on tobacco products will benefit the
country or cause greater problems for the economy is still up for debate. As I write these words, the
Senate Ways and Means Committee is preparing to hold its final public hearing on the proposed
revisions to the sin taxes - to say that a lot is riding on their deliberations is putting it very mildly
indeed. Because the answer to the question of whether the sin tax on tobacco products will be a bane
or a blessing is an answer that will have far-reaching consequences for millions of Filipinos, smokers
and non-smokers alike, and certainly for this asthmatic. I dont know about you, but Im rather glad
Im not sitting in that Committee, and that I dont have to make the decisions theyll have to make.
It makes me wheeze just thinking about it.

(The article reflects the personal opinion of the author and does not reflect the official stand of the
Management Association of the Philippines. The author is a Senior Partner of The Tax Offices of

Romero, Aguilar & Associates and member of the MAP National Issues Committee and the MAP Tax
Committee. Feedback at map@globelines.com.ph. For previous articles, please visit <map.org.ph>)