Group warns sin taxes to encourage smuggling, sees gov’t increasing income taxes

A vendor sells cigarettes at a supermarket in Quezon City in this file photo. A proposed bill restructuring the excise tax on tobacco and alcohol products is seen to generate some P60 billion, according to President Benigno Aquino III, who is pushing for the passing of the sin tax reform bill. AFP/JAY DIRECTO

MANILA, Philippines—A group of businessmen and professionals has warned that the government would lose, instead of generate more, revenues if it implements the proposal to slap much higher taxes on cigarettes. In the end, government might resort to increasing income taxes, the group warned.

In a statement, the Caucus for Philippine Competitiveness (CPC) said a hike in cigarette taxes of as much as 1,000 percent, as proposed by some legislators, would cause a steep increase in prices of cigarettes produced by legitimate cigarette manufacturers and, therefore, would cause a shift in demand in favor of cheap and smuggled cigarettes.

CPC, a non-government organization focusing on economic advocacy, said government would lose a lot to cigarette smuggling. Legitimate businesses will suffer reduced sales, while smugglers who do not pay taxes will be the ones to enjoy higher sales. .

It said the promise of higher government revenues arising from the increase in cigarette or “sin” taxes would only hold true during the first year of implementation of the tax hike. Starting the second year, CPC warned, the decline in tax collection would be felt.

The goup said government might compensate for the lost revenues from cigarette taxes by increasing rates of other taxes, such as the income tax or impose new ones.

“If health and finance officials succeed with legislation of 1,000 percent hikes, sin tax revenues would contract by the second year of implementation like it did in Singapore,” said CPC chairperson Mike Lopez said in the statement.

“To make up for losses, government will be compelled to increase income taxes or impose new ones like the dreaded text tax on SMS messages, which Congress has time and again been eyeing,” Lopez added.

CPC released its statement amid pending proposal in Congress to impose much higher taxes on cigarettes.

The Department of Finance is pushing for the tax hike, a move that is believed to help the government generate much more revenues. The Department of Health is another advocate of the proposal, saying higher taxes would help reduce the number of smokers and thus the incidence of smoking-related deaths.

The push for higher taxes on cigarettes is being backed by the Asian Development Bank, which in a report cited the Philippines as one of the countries to suffer from the biggest numbers of smoking-related deaths if no government intervention on smoking trend is done.

In its report titled “Tobacco taxes: a win-win Measure for Fiscal Space and Health,” the ADB said the Philippines, together with China, India, Thailand, and Vietnam, are seen to eventually register 267 million smoking-related deaths over the short to long term if current smoking trends continue.

It also said governments of the five countries could benefit from higher revenues if they imposed higher cigarette taxes.

ADB said a 70- to 122-percent increase in cigarette taxes in the five countries, which would result in a 50-percent increase in cigarette prices, would cut the number of smokers by 67 million and reduce smoking-related deaths by more than 27 million.

In addition, the five countries would be able to generate $24 billion in additional revenues a year. ADB said such an amount would represent a 143- to 178-percent increase in revenues generated by the governments of the said countries from cigarette taxes.