The wise man has the power to reason away. —Michael Mc Donald
“The two-tier tax system will benefit the government in terms of revenues. Not only will it benefit local farmers, it will also continue to help the economy,” Lt. Gen. Edilberto P. Adan, AFP (ret.), Mighty Corp. president, said.
But Adan added that the company would support any decision that the government would make on the cigarette tax issue.
“Mighty Corp. has always been fully supportive of the government’s efforts to raise revenues from tobacco products, promote health, and support local farmers,” Adan said.
“We only wish to point out that House Bill 4144 is the most advantageous measure for the government because it is expected to optimize revenue generation, address the concerns of health advocates, and provide local tobacco farmers with a steady stream of livelihood opportunities,” The MC chief said.
HB 4144 proposes the adoption of a two-tier system in place of a unitary tax rate which is supposed to be implemented starting in January next year.
Under Republic Act 10351 or the Sin Tax Reform law, the excise tax rates for cigarettes––currently at P25 per pack for low-priced brands and P29 per pack for premium brands––is to be replaced by a unitary tax rate of P30 per pack.
HB 4144 aims to amend Section 145(c) of the National Internal Revenue Code which mandates the imposition of the unitary tax rate.
Adan said the success of RA 10351, which has been hailed by institutions like the World Bank as a model tax measure, and praised by health advocates, can be traced to the introduction of a two-tier system for excise taxes.
He explained that the government was able to collect record revenues on the strength of the tax system.
“We believe that HB 4144 will be a boost to the Duterte administration’s tax reform program,” Adan said.
Some members of Congress have also argued that the unitary tax system is a regressive policy because it is applied indiscriminately to all consumers irrespective of economic class.
The House Ways and Means Committee approved the proposed measure last week, saying the two-tier system supports the constitutional directive for Congress to adopt a progressive taxation system that considers the taxpayer’s buying capacity.
Legislators also said HB 4144 addresses the decline in sin tax collections and curbs smoking prevalence, especially among the youth and the poor.
Department of Finance data showed that there has been a significant downtrend in excise tax collections over the past year, making it imperative to adopt HB 4144.
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A uniform can be comfortable clothing for some but is a straightjacket to others.
The same is true for legislation: it can’t be one-size-fits-all all the time.
A study by Dr. Dahlia K. Remler, an expert on the issue health economics at Harvard University, said cigarette taxes have been found to be regressive for two reasons.
First, sales tax are generally regressive because the rich save and invest a large portion of their income than the poor, and so the poor spend a larger share of their income on consumption.
Second, since the prevalence of smoking is higher among the poor, cigarettes are in fact disproportionately consumed by the poor.
The two-tier approach would lessen the impact of the regressive tax as it tends to approximate the tax imposable to taxpayers based on their respective income levels.
The International Monetary Fund itself stated, “Ultimately, tobacco excise tax rates must reflect the purchasing power of the local consumers, rates in neighboring countries, and above all, the ability and willingness of the tax authority to enforce its compliance.”
Fr. Joaquin Bernas opined in his Commentary on the 1987 Philippine Constitution (2009) that the explicit mention of progressive tax in the Constitution reflects the wish of the Commission that the legislature, following the social justice command, should use the power of taxation as an instrument for a more equitable distribution of wealth.
HB 4144 proposes a two-tier system with an excise tax rate of P32 per pack on cigarette packs priced P11.50 and below (low-end) and P36 for those priced higher (premium) and a five percent increase thereafter beginning 2018.
The precursors of the current Sin-Tax Law, House Bill No. 5727 and Senate Bill No. 3299, considered and provided for the two-tier approach which was eventually rejected.
Staunch two-tier supporter Senator Ralph Recto predicted in a Philippine Daily Inquirer report dated October 14, 2012 that a radical change in structure from the original four-tier to a one-tier or unitary system means a move to loss revenues.
The Aquino administration instead passed a unitary tax system into law thinking it would result in an increase in revenues.
However, Department of Finance data as of October 2016 revealed an excise tax collection decrease of 13.30% or more than P8 billion from the previous year, ultimately making the unitary system a counter-productive measure.