Economist urges review of excise tax rates on cigarettes in PH
Bienvenido S. Oplas, Jr., president of Minimal Government Thinkers (Manila) and international fellow of Tholos Foundation (Washington D.C.)
A Filipino economist said that excise tax rates on cigarettes in the Philippines should be revisited to bring them closer to the revenue-maximizing rate.
Bienvenido S. Oplas Jr., president of Minimal Government Thinkers (Manila) and an international fellow of Tholos Foundation (Washington D.C.), said while the shift from a multi-tier tax system to a single-tier or flat rate tobacco tax is good, “it is time to reevaluate, even reverse the tax rate back to a level that produced the highest tobacco tax revenues.”
Minimal Government Thinkers is an independent think tank advancing the four core principles of small government: small taxes, free market, and individual freedom and responsibility.
The national government has been collecting less and less revenues from tobacco as excise tax collections have been on a steady decline over the last three years, dropping from P176 billion in 2021 to P160 billion in 2022 and P135 million in 2023. At the same time, the incidence of non-taxpaid illicit cigarettes continued to rise.
Oplas said that based on the country’s experience, “the optimal tax rate is P50/pack, which produced peak tobacco tax revenue of P176 billion in 2021.”
Article continues after this advertisementOplas further said things “went south” as tobacco tax rates climbed. “At a tobacco tax rate of P55 per pack in 2022, tax revenue was P160.3 billion, or a P16.2 billion decline from 2021; at P60 per pack in 2023, it was just P134.9 billion, or a P25.4 billion decline in 2022 and a P41.6 billion decline from 2021,” he said.
Article continues after this advertisementOplas agreed with the observation of Dr. Arthur Laffer, founder, and chairman of Laffer Associates, an economic research and consulting firm in the United States, that while the Philippines has, “in general, done a very good job of reforming its system of tobacco taxation from a complicated multi-tiered system to a simple structure with uniform tax levels for all cigarettes,” tobacco excise tax rate has reached a “prohibitive range,” as evidenced by declining government revenue.
“Based on the Philippines’ experience with ever-increasing tobacco tax rates and subsequent revenue declines, it seems that tax rates have exceeded the revenue-maximizing rate and ventured into what is known as the ‘prohibitive range’ of taxation,” said Dr. Laffer, a former member of President Ronald Reagan’s Economic Policy Advisory Board and the creator of the Laffer Curve, which illustrates the relationship between tax rates and government revenue.
Laffer said the phenomenon of declining tobacco tax collections in the Philippines could be explained using the Laffer Curve — the relationship between tax rates and tax revenue. “Tax revenues increase with increasing tax rates until a revenue-maximizing point is reached, after which further increases in tax rates result in declining tax revenue,” Laffer said.
“As previously discussed with declining tobacco tax revenues after successive tobacco tax rate increases, it seems that the Philippines has pushed tobacco tax rates past the point of revenue maximization on the Laffer Curve, and any further increases to the tax rate at this time would likely result in further revenue declines and increases in illicit trade,” said Laffer.
Oplas also agreed with Laffer’s claim that high tax rates could lead to the proliferation of illicit trade.
“Government enforcers are humans, not robots that can be indifferent to offers of favor. As tax rate increases, the temptations to go into illicit trade also increase, and the compromises by government enforcement agencies also increase,” said Oplas.
Laffer earlier said, “The proliferation of illicit trade is a function of high tax rates coupled with low affordability and likelihood of enforcement.”
Oplas said a lower tax rate would narrow the difference between the prices of legal and illegal products. “Lower tax rate means the price differential between legal and illegal products is low, and hence, the incentive for consumers to migrate to illicit products is low too,” he said.
Laffer also said that given the declining tax revenue and increased growth in the illicit trade of tobacco in the Philippines, “it is time to reevaluate the optimal cigarette tax rate.”
Laffer, who is advocating for a tax system that raises necessary revenue while minimizing economic damage, said that “by coupling tax base expansion with tax rate decreases, the Philippines can bolster and diversify tax revenue collection without jeopardizing economic growth.”
