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RAISING TOBACCO TAX IN THE PHILIPPINES

OUTLINE

I.  Rationale in increasing tobacco tax II.  General view on raising tobacco tax III.  Legislative history of excise tax IV.  Weaknesses of the current excise tax structure V.  Sin tax bills VI.  Health and revenue goals

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RATIONALE

 Tobacco epidemic is one of the greatest public health threats of modern times. Total population of smokers are expected to reach 1.6 billion by 2025.

 Despite tobacco control efforts, smoking prevalence in the country remains high.

 Studies show that increasing tobacco taxes is one of the most effective means to reduce consumption.

GENERAL VIEW

 Framework Convention on Tobacco Control, Article 6 recognizes that the price and tax measures are effective and important means of reducing tobacco consumption by various segments of the population.

 World Bank recommends tax that is two-thirds to fourth fifths of the retail price of tobacco products

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LEGISLATIVE HISTORY – EXCISE TAX

 NIRC – CA 466

 RA 8424 (1997)– mixed specific/ ad valorem tax system

 RA 9337 (2004)- retained the four-tiered system set by RA 8424

WEAKNESSES OF THE CURRENT EXCISE TAX STRUCTURE

 Multi-level Specific Excise Tax Structure

 Price Classification Freeze

 No price indexation

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SIN TAX BILLS

 HB 3759   Seeks to impose a uniform excise tax rate of P14 per

pack

 HB 6079   Unitary tax for each category of tobacco and alcohol

products

 HB 4951   Restructure the excise tax on alcohol and tobacco

products and earmarking portions of incremental revenue resulting from the tax to fund vital health programs of the government.

HEALTH AND REVENUE GOALS

 Health Goal   Reduce cigarette consumption by 10% (DOH)

 Revenue Goals   Raise additional revenue   Simple and equitable excise tax structure   Use tax to internalize the negative externality of

cigarette consumption

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MEASURING IMPACT OF CIGARETTE TAX INCREASE

OUTLINE

I.  Brief background on studies measuring price elasticity of demand for cigarettes

II.  Measuring impact on revenue based on the DOF estimated elasticity

III.  Measuring impact on consumption based on the UPSE and DOH estimated elasticity

IV.  Measuring impact on health costs

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STUDIES MEASURING PRICE ELASTICITY OF DEMAND FOR CIGARETTES

Study DOF UPSE and DOH

Data time series

(aggregate level) cross sectional

(household level)

Price Data

country CPI on tobacco

regional average price

Estimated Elasticity

-0.235 -0.52 to -1.09 (Average = -0.87)

STUDIES MEASURING PRICE ELASTICITY OF DEMAND FOR CIGARETTES

Study DOF UPSE and DOH

Strength o  Captures variable changes over the course of time

o  Data closer to individual level data

o  Controls for household characteristics

o  Elasticity is income class-specific

Weakness

o  Estimated elasticity may be underestimated or overestimated

o  Prices used are regional averages

o  Does not capture variable changes over time

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 Recommendations to improve estimation of price elasticity of cigarettes   For time series data

  Need to extend data as far as 1970   Separate estimations may be done for each price

classification

  For cross-sectional data   Need to obtain data on cigarette price faced by household   A difference-in-difference (DID) model using pooled cross

section data may be used

STUDIES MEASURING PRICE ELASTICITY OF DEMAND FOR CIGARETTES

IMPACT ON REVENUE (DOF ELASTICITY)

 Limitations   Base period: 2008   Retail price: average of cigarette price data from NSO

(excludes retail price of imported brands)   Excise tax per pack: average of excise taxes   Cigarette consumption: based on data on removals

from BIR (data on premium-priced not available)

 Assumptions   Effective tax collection   No shifting of brands   Level of smuggling does not change

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First Year Estimated Impact

Proposal

LacsonBill (two-tiered)

Suarez Bill (Uniform PhP

14.00)

World Bank (65% of retail price =

PhP 30.00)

Increase in Excise Tax (in PhP)

9 B 31 B 67 B

Increase in Excise Tax as % of 2008 GDP

0.13% 0.42% 0.91%

Equivalent to 50% of 2008 budget for SCUs

2008 budget for DOH and 50% of 2008 budget for SCUs

2008 budget for DOH and DA and 50% of 2008 budget for SCUs

IMPACT ON REVENUE (DOF ELASTICITY)

  Limitations   Base period: 2008   Retail price: average of cigarette price data of top brands

available per price band from NSO (excludes retail price of imported brands)

  Excise tax per pack: according to price band   Cigarette consumption: based on data on removals from

BIR (data on premium-priced not available)   Assumptions

  Price elasticity corresponds to price band   Effective tax collection   No shifting of brands   Level of smuggling does not change   Decrease in smoking prevalence: 10% decrease in

consumption translates to 1% decrease in smoking prevalence in the medium term

IMPACT ON CONSUMPTION (UPSE AND DOH ELASTICITY)

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Estimated Impact

Proposal

LacsonBill (two-tiered)

Suarez Bill (Uniform PhP

14.00)

World Bank (65% of retail price =

PhP 28.00 to PhP 40.00)

Decrease in Consumption (in packs)

1.42 B 2.85 B 4.23 B

% Decrease in Consumption

29.98% 60.19% 89.40%

Decrease in Smoking Prevalence

3.00% 6.02% 8.94%

IMPACT ON CONSUMPTION (UPSE AND DOH ELASTICITY)

IMPACT ON HEALTH COSTS

Summary of Economics Costs in US$ for Four Smoking-Related Diseases, 2003* ($1 = PhP 52)

Method Peto-Lopez SAMMEC Lung Cancer 76,074,756 202,306,009

Cerebro-Vascular Disease

961,417,548 3,476,758,951

Coronary Artery Disease

1,267,531,634 1,638,647,686

Chronic Obstructive Pulmonary Disease

550,144,348 728,135,692

ALL 4 DISEASES 2,855,168,287 6,045,848,339

* Tobacco and Poverty Project in the Philippines, 2006

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 Limitations   Based on 2003 estimates   Decrease in health costs derived from estimated

decrease in smoking prevalence using UPSE and DOH elasticity

 Assumption   Health cost is directly related to smoking prevalence.

Magnitude of which is arbitrarily determined.

IMPACT ON HEALTH COSTS

IMPACT ON HEALTH COSTS

Assumption

Proposal

LacsonBill (two-tiered)

Suarez Bill (Uniform PhP

14.00)

World Bank (65% of retail price =

PhP 28.00 to PhP 40.00)

%Dec in Cost = 1/2 of %Dec in Smoking Prevalence

2.23 – 4.72 B 4.47 – 9.46 B 6.64 – 14.05 B

Equivalent to

2008 budget for food for

school program

2008 budget for housing and

food for school program

2008 budget for NFA, housing and

food for school program

%Dec in Cost = 1/4 of %Dec in Smoking Prevalence

1.11 – 2.36 B 2.23 – 4.73 B 3.32 – 7.03 B

Equivalent to

50% of 2008 budget for food

for school program

2008 budget for food for school

program

2008 budget for NFA and food for school program

Projected Private Health Cost Savings in PhP for Four Smoking-Related Diseases

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SUMMARY

We must recognize  DOF customarily makes a projection of Revenue  DOF mandate is to increase revenue as much as

possible to meet a balanced budget  DOH (through NEC, UPManila, UPSE studies)

developed a process to project Reductions in Smoking Prevalence and Health Costs   The latter still needs to be done

 DOH indicated a possible target of 10% reduction in Consumption during a TWG ( No specific target stated in the National Health Objectives of 2005-2010)

IMPACT ANALYSIS: HEALTH VIEW

Estimated Impact

Proposal

LacsonBill (two-

tiered)

Uniform Specific

Tax = PhP 10.00

Suarez Bill (Uniform

PhP 14.00)

World Bank (65% of retail price = PhP

28.00 to PhP 40.00)

Reduction in Smoking Prevalence Based on DOH computation

3.00% 3.64% 6.02% 8.94%

Number of Years to reach 10%* target

3.3 2.7 1.6 1.1

* 10% discussed in TWG and based on National Health Obj Target 2005-10

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IMPACT ANALYSIS: REVENUE VIEW

Estimated Impact

Proposal

LacsonBill (two-

tiered)

Uniform Specific

Tax = PhP 10.00

Suarez Bill (Uniform

PhP 14.00)

World Bank (65% of retail price = PhP

28.00 to PhP 40.00)

Impact on revenue based on DOF elasticity (PhP)

9 B 17 B 31 B 67 B

Impact on revenue based on UPSE & DOH elasticity (PhP)

8 B 3 B -1 B -10 B

HIGHLIGHTS

  To follow WB recommendation (tax should be 65% of Retail Price), a minimum of P28 increase in excise tax should be applied*

  DOH Target will likely be achieved in the short-run (in 3 years), based on their computations, if the Suarez Bill or the World Bank recommendation will be adopted

  However, although revenue projections based on the DOF elasticity are always positive, revenue projections based on the UPSE and DOH elasticity are negative for the Suarez Bill or WB recommendation. Hence, the need to compute the optimal tax level.

* VAT is excluded in the 65% computation

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CONCLUSION

  Increasing cigarette tax has great potential in:   Improving fiscal balance through increased excise tax

revenue   Reducing consumption of cigarettes   Decreasing private health costs due to smoking-

related diseases

 Optimal tax level can be achieved by striking a balance between achieving health and revenue targets in the short run.

REMOVING THE PRICE CLASSIFICATION FREEZE An Alternative Proposal

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LIMITATIONS

 Base period: 2006  Cigarette brand volume shares based on 2006

Euromonitor data  Retail price: average of cigarette price data per

brand from NSO  Excise tax per pack: according to price band as

indicated in Annex D of RA 8424  Cigarette consumption: based on data on

removals from BIR (data on premium-priced not available)

 Brands selected based on availability of volume share, 1997 price classification and price data

ASSUMPTIONS

 Price elasticity corresponds to price band (UPSE and DOH elasticity used)

 Effective tax collection  No shifting of brands  Level of smuggling does not change

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SELECTED BRANDS

Brands 2006

Volume Share

1997 Price Band (RA 8424, Annex D)

2006 Price Band (Estimated)

Marlboro 26.10 % High Premium

Winston 20.20 % Medium Premium

Camel 6.00 % Low Premium

Philip Morris 0.80 % High Premium

Fortune 0.40 % Low High

Total Volume Share

53.5 %

IMPACT OF PRICE CLASSIFICATION FREEZE REMOVAL

Brands Decrease in

Consumption Revenue Increase

Marlboro 44.55 % 33.93 %

Winston 78.82 % -16.62 %

Camel 100.00 % -100.00 %

Philip Morris 42.79 % 38.18 %

Fortune 96.68 % -82.84 %

% of Total 22.65 % 10.72 %

In unit terms 1.05 B packs PhP 2.81 B

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REMOVING PRICE CLASSIFICATION FREEZE

 Although estimates refer only to 50% of the total market has the effect of decreasing approx 20% of consumption in the 50% of the market ( using UPSE price elasticity) unless the smokers shift to cheaper brands

 Can increase revenue by at least P2B   Can be done by simply repealing the “Protection

Clause” for existing brands under the RA9334

CONCLUSION

 Removal of price classification freeze per se creates:   Additional excise tax revenue   Substantial reduction in consumption of cigarettes

and health costs due to smoking-related diseases

 However, other issues still remain:   Difficulty in administering taxes due to 4-tiered

classification   Brand substitution would still be rampant   Reduction in consumption is still less than reduction

in consumption if excise tax is uniform specific