How far can your TRAIN take you?

The period of amendments on package 1 of the Tax Reform for Acceleration and Inclusion bill (TRAIN) is about to take place in November in the Senate. TRAIN, if passed close to its original form, is expected to generate P150 billion in 2018 and fund new programs for infrastructure, education, health, and social protection. However, the proposal was significantly diluted under Senate Bill 1592 (SB 1592), which is the subject of the upcoming period of amendments.

A number of analysts and opinion-makers have asked how much of the “Build, Build, Build” infrastructure program will depend on the fresh funds that will be raised from TRAIN.

Last October, Ways and Means Chair Senator Sonny Angara clarified during the plenary deliberations that only 17% or P1.4 trillion of the P8.3-trillion infrastructure financing requirement for the next five years will be covered by package 1. That means a yearly additional budget of P150 billion will be needed and the revenue target from TRAIN will be sufficient.

Meanwhile, other new programs, a few of which were passed by Congress will begin in 2018. These include the free college education law, rehabilitation of Marawi, public utility vehicle modernization program, and universal health care. Add to that the unconditional cash transfers program, tied to the passage of TRAIN, which is critical to the smooth transitioning of the poorest households to the new tax regime, and we get a whopping P200-billion financing gap.

Without a doubt, a significant trade-off between the “Build, Build, Build” projects and these new programs would have to happen even if we assume that a good version of TRAIN package 1 will be passed.

Unfortunately, for Senator Angara’s TRAIN, the estimated revenue is P60 billion. Yet, in its earmarking provision, SB 1592 promises a long list of new programs different from those already mentioned above. The major ones are programs to address hunger and malnutrition, provision of social pension to all senior citizens, grant financing and housing for fisherfolks, and mass transportation, among others. How Senator Angara intends to deliver these promises given the expected revenue from his TRAIN is unanswered.

A closer look at the disaggregated figures reveals that P44 billion of the total revenue estimates for all versions of TRAIN is expected to be raised from “tax administration” measures, specifically the implementation of fuel marking (P20 billion), improvement in exchange of information and relaxing of the Bank Secrecy Law (P15 billion), and adoption of electronic invoicing and connection (P9 billion).

In all likelihood, these notional amounts are significantly more than what the said measures will be able to generate. In other words, the revenue estimates are overly optimistic.

Moreover, with respect to SB 1592, the Department of Finance has yet to compute for the impact of the two VAT-related insertions that Senator Angara made.

These pertain to the granting of VAT zero-rating to goods sold and services rendered to special economic zones and freeport zones, which spells more tax leakage. With these insertions, SB 1592 may even generate a net loss instead of a gain.

Hence, a strong case for Sen. Angara’s adoption of amendments that will bring the Senate bill closer to Sen. Koko Pimentel’s SB 1408 exists.

In addition, insofar as the new programs aside from the infrastructure program require at least P200 billion in 2018, Sen. Angara must include the civil society proposal on raising the tobacco tax, which will bring additional P50 billion to P70 billion in incremental revenue.

Tax policies are best appreciated when the commensurate benefits are utilized, known and clearly stated as was seen in the Sin Tax Law with its specific earmark to universal health care. If Senator Angara includes the civil society proposal on increasing tobacco taxes, the additional revenue together with that from sugar sweetened beverages can raise the financing needed to expand the universal health care program.

Keeping the original TRAIN proposal and adopting the tobacco tax proposal will result in revenues reaching the P200 billion needed for the anticipated spending.

The good news for the politicians is that the sin tax is a popular tax. The people support increasing sin taxes, particularly tobacco. Immediately increasing tobacco tax at the rates being proposed in the Senate will save lives and prevent 200,000 new smokers from taking that first step into death, disease, debt and disability beginning.

Jo-Ann Latuja Diosana is a trustee of Action for Economic Reforms. Mayi Fabros is a fellow.