The recent hearings-like proceedings in the House of Representatives regarding the taxation of cigarettes has brought back to the forefront of public discussion the issue of which characteristic should be accorded the highest priority in the crafting of a tax program for a developing country.
The House proceedings conducted by that chamber’s ways and means committee focused on House Bill No. 4144, which sought to keep in place a two-tier cigarette tax system that went into effect with the approval in 2013 of Republic Act No. 10351. Under RA 10351 a pack of cigarettes priced at P11.50 carries a tax of P25 and a pack priced above P11.50 bears a tax of P29.
I described the House proceedings on Bill 4144 as “hearings-like” because the House appears to have handled the bill in whirlwind fashion – other observers have used the word “railroaded” – having been accorded only two ways and means committee hearings (Nov. 28 and Dec. 5) after its October 2016 filing. The apparent intent was to get House plenary approval, reconciliation with the Senate counterpart bill and presidential approval into law before the end of the year. Why Dec. 31, 2016?
Because on Jan. 1, 2017, the shift to a unitary cigarette excise tax called for by RA 10351 would go into effect. Beginning Jan. 1, 2017, all cigarettes – regardless of price per pack – would pay a uniform P30 excise tax. Why the strong push to maintain a two-tier tax system and avert a shift to a military system? The answer underlies the question I posed, at the start of this column, as to which characteristic should be accorded the highest priority in the crafting of a tax program for a developing country.
Should the tax policymakers of a developing country – or of a developed country, for that matter – accord higher priority to a tax program that is soundly structured and elegantly phrased but is difficult to administer? Or should they aim for a tax program that is less than 100 percent sound but is comparatively easy to administer? The Department of Finance expressed its preference in the position paper on the subject of HB 4414. “[A] unitary tax structure is simpler and easier to administer,” said DOF in the position paper.
How so?
DOF explained the tax-administration problem as follows: “[A] two-tiered tax structure only promotes downshifting [among tobacco consumers] … Differences in price as a result of different tax rates change the behavior of consumers by downshifting to the low-taxed [and therefore] low-priced brands from high-taxed, high-priced brands … Based on the industry’s pricing strategy, during the first year of reform implementation, [after 2013], the two-tiered tax structure allowed some tobacco manufacturers to sell at a loss just to maintain or increase their market shares. Further, DOF data show that they imposed higher price increases on their premium brands in order to subsidize their low-priced brands.”
These cigarette-manufacturer marketing policy changes could – and should – have been foreseen by Congress when they were considering the bill that became RA 10351. Whether legislators did or not is now history. What is not history is the current massive push to prevent the shirt to a unitary tax regime for cigarettes.
Perhaps the most potent argument for proceeding with the scheduled shift to a unitary tax is the mighty opposition of Mighty Corp., the largest manufacturer of low-priced cigarette brands. It speaks volumes.
In conclusion, a tax program that is somewhat short on economic logic but is easy to administer is preferable to a program that is perfectly logical but does not bring in the tax revenues.