Tobacco Tax May Cut Cigarette Consumption

Reforming the tobacco tax system may be the key to discouraging cigarette consumption and reduce the growing incidence of tobacco-related illness such as lung cancer and heart disease.

Cheap cigarettes is one of the reasons why the Philippines with over 17 million smokers - has one of the highest smoking Prima Lux prevalence rates in the world. This is expected to lead to huge socio-economic losses.

According to a study by Health Justice Philippines, around 35, 000 Filipinos die every year due to tobacco-related diseases.
Secondhand smoke also causes adverse health effects. The economic costs, including expenses for health care and cost of productivity losses, amount to over 400 billion pesos (9.2 billion US dollars) .

This is why, according to economist Jo-Ann Latuja, there's a need top revise the existing taxes imposed against so-called "sin products" like cigarettes and alcohol.

"The purpose of sin taxes is to discourage consumption of sinful products like cigarettes. But our current taxation system is not effective in doing that," Latuja said in an interview with Xinhua.

Jo-Ann Latuja is a fellow of the Action for Economic Reforms (AER), a Manila-based advocacy group that is actively campaigning to use tobacco taxation to improve public health and boost government revenues.

As the world observes World No Tobacco Day May 31, the AER released a statement noting that a reform in the tax system will raise more revenues and fund the administration's urgent programs, including the Universal Health Coverage Program.

An AER study, authored by Latuja and Filomeno Sta. Ana III, revealed that cigarette excise tax as percentage of gross retail price (GRP) ranges from 14 percent to 42 percent based on 2010 cigarette prices. This is below the World Health Organization's recommended rate of at least 70 percent of the GRP and is the reason why the Philippines has one of the world's lowest cigarette prices. A pack of 20 cigarette sticks retails for less than one U. S. dollar in Manila.

The AER has noted three major weakness in the current tobacco excise tax system - the absence of indexation of taxes to inflation, the price classification freeze, and the multi-tiered tax structure.

Taxes imposed cigarette prices did not keep up with inflation as taxes were computed based on the 1996 retail prices.

"The combination of the price classification freeze and the absence of a yearly adjustment to inflation have diminished the real value of tobacco taxes over time. Automatic inflation adjustment is necessary to ensure the robustness of revenues from the specific tax for tobacco," the study said.

Under the multi-level tax structure, the government imposes different specific tax rates for each price classification. Lower priced cigarettes are taxed low while higher priced cigarettes are taxed high, thus widening the price gap between higher and lower price classes of cigarettes.

"But the taxes should be levied on the quantity of cigarettes consumed and not on the price of the cigarettes," Latuja said, noting that whether a smoker buys a cheap or expensive brand of cigarettes, the smoker will suffer the same harmful effect of nicotine addiction.

And instead of quitting, smokers who can't buy expensive brands will just shift to lower-priced cigarettes. The AER study noted the multi-level tax structure "diminishes the effectiveness of the excise tax as a tool to reduce consumption."

This is why AER is proposing that instead of multi-level tax structure, the government needs to impose a more unitary tax structure. This will not only lead to better tax administration but also boost revenues.

The AER said its proposal won't hurt local tobacco farmers because the tax is levied on the final product, cigarettes, and not on the raw materials for cigarettes, which are produced by the local tobacco farmers.

The AER's proposal have been included in several bills filed in the House of Representatives.