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Money splendored thing.

Byline: Conrado Banal

IMF MANAGING director Christine Legarde, who according to reports is in the Asean region on a three country swing, has this to say about good taxation: One, the tax must have a broad base and, two, it must only be a small rate.

Surely, Legarde was not referring to the hotly contested "sin tax" bill in the Senate, sponsored by Sen. Franklin Drilon as chair of the ways and means committee, who by the way is also chair of the finance committee.

It is just that the Drilon bill, which fully adopted the version certified as "priority" by the Aquino (Part II) administration, complete with the many splendored things like health benefits and truckloads of money for the government to come up with economic miracles, precisely seeks to impose an increase in the excise tax on low priced cigarettes of more than 1,000 percent in the next four years.

Thus, as is evident in the plenary debates in the Senate on the bill so far, other senators agreed that, like the proponents of the 1,000-percent tax increase, they also wanted Filipinos to stop smoking.

It was just that, well, they questioned the means espoused by the administration to get rid of the vice, which precisely would be "excessive" taxation--even at the expense of the small guys in the tobacco industry, none other than the tobacco farmers.

Incidentally, from what I gathered, the farmers already pleaded with our leader Benigno Simeon (aka BS) to block the Drilon bill, mainly because 1,000-percent tax increase would hurt the farmers. Why? Well, for the simple reason that the low-priced brands make up more than 60 percent of the local tobacco market--the same market served by the farmers.

Anyway, other senators were saying that Drilon bill would certainly wipe out the market for the low priced cigarettes that, in fact, account for the biggest revenue collection of the BIR from the tobacco excise tax.

Yet the proponents--mainly the boys and the girls of our leader BS--insisted that their version would generate an additional P40 billion in revenues. This, of course, other senators found incredulous.

Really, the government collected a negligible amount of revenues from the so-called premium brands that had the highest tax rates.

Sen. Ralph Recto, the former chair of the ways and means committee who resigned after the Palace boys and girls lambasted him in media, noted for example that the Drilon bill the assumed that smokers would still buy the low grade cigarette brands even after the 1,000 percent tax increase.

Official figures seemed to support Recto, such as the excise tax collection in 2011 showing that low-priced brands accounted for 2.97 billion packs of cigarettes sales, or more than 60 percent of the market, mid-priced brands at 451 million packs or only 10 percent, and the high-priced brands with 1.1 billion packs or 25 percent. The rest of the market share was the "premium" brands. It thus was practically nothing.

Yet in their version, the Palace people assumed that, from out of the blue, the "premium" brands would generate sales of 955 million packs, enabling the government to collect fresh revenues of P27 billion, or more than half of their P40-billion target.

And so Recto found the bill dubious. For one, how could anyone assume that smokers would "upgrade" to the more expensive brands because the bill inflated the tax on low-grade cigarettes by more than 1,000 percent? Recto called the assumption well, overly optimistic.

Now the tobacco growing area in the country has always been the Ilocos region, and so the gentleman from Ilocos Norte, Sen. Ferdinand Marcos Jr., also stood up to question the validity of the revenue projections in the Drilon bill.

According to Marcos, the trend showed that smokers were going for cheaper brands equivalents, and not the other way around, from cheap to premium, particularly in the years 1997 to 2011. Those were the years, by the way, when the cigarette excise taxes were increased.

Saying that he had the data on the tobacco industry collated in the past 14 years, Marcos noted that the market share of low-priced, low-taxed cigarettes increased by more than 50 percent, while the sales of high-priced, high-taxed brands dipped.

To Marcos, if the tax would make the brand expensive, the users would always find the cheaper equivalent. And this would most likely be served by--dandararan--the smugglers.

Marcos also pointed out that, based on actual figures in the past several years, majority of smokers belonged to the "D" and "E" market segment-yes, low-income class. For instance, even in the high-priced brands, about 84 percent of smokers belong to the low-income class, and it was higher at 92 percent for the mid-priced brands.

Meaning, of course, that even if the cigarette tax were raised up to another galaxy, the low-income class would still try to find ways to smoke. And so how could the administration bill be said to be a "health reform measure?"

On the side of the proponents, nobody could come up with facts and figures to counter the points raised by Marcos, even including the back-ups sent by the Department of Finance and the BIR.

The Palace version of the bill, in other words, seemed to be flawed with wrong assumptions, projecting collections of huge revenues straight from dreamland.

Implication: the government would fail to realize its tax goals under the Drilon bill, and so because of the shortfall, the government would have to impose new taxes or increase existing taxes some more and on and on and on.

Such was the warning issued by the NGO called Caucus for Philippine Competitiveness (CPC), noting that the promise of higher government revenues from the cigarette tax increases would only hold true for the first year, but the collection would already decline by the second year.

Why is that? Well, the CPC feared that, like in other countries that imposed too high taxes on cigarettes, apparently to discourage smoking, in this country smuggling of imported cigarettes would also become rampant.

Because of the failed expectations of high revenues from the "sin tax" bill, the CPC noted that the government would then have to increase income taxes, for instance, or impose new taxes like the proposed "text tax."

By the way, to the IMF head Legarde, the tax on text messages may not be a bad idea at all. She reportedly said that the government might also want to look into such a tax.

And, aside from her suggestion that tax should have a broad base and that it should be done at small rates, she left us with another bit of precaution: when the Aquino (Part II) administration tries to raise revenues, it should also do so "one step at a time."

Truly, if there is such a thing as "donor fatigue" in raising funds for charity, there is also this thing known as "exhausted taxpayer," particularly the honest guys who must shoulder every new tax imposition of the government, while the crooks just keep on avoiding the new imposition.
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Publication:Philippines Daily Inquirer (Makati City, Philippines)
Date:Nov 19, 2012
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