“The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it….He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”
— Adam Smith,
Theory of Moral Sentiments
That observation by Adam Smith also applies to the plan of many sectors to further raise tobacco and alcohol taxes to fund higher resources for universal health care (UHC).
There is a clear contradiction here. The stated goal is to further reduce smoking and drinking but there is implicit demand for more smokers and drinkers who will pay more tobacco and alcohol taxes to fund more UHC beneficiaries and health care providers.
There are four stories in BusinessWorld this week related to this:
1. House hearing bills on P40-P60 per pack increase in cigarette tax (Nov. 26),
2. Senate panel opens hearing on raising tobacco tax (Nov. 26),
3. Alcohol tax hike hurdles House committee on 2nd reading (Nov. 26),
4. Tobacco excise bill hurdles House on 2nd reading (Nov. 28).
In report #2, Senator Pacquiao’s bill proposes a cigarette tax hike to P60 per pack, Senator Ejercito’s bill wants to raise the tax up to P90 per pack, to cover the estimated P164-billion funding gap in UHC on top of current funding of only P93 billion.
In report #3, the plan is to generate P60 billion for five years in higher alcohol tax rates. Distilled spirits ad valorem tax on net retail price (NRP) per proof liter will rise from 20% to 22%, in addition to a rise in specific tax from P23.40 to P30 per liter in 2019, P35 in 2020, P40 in 2021, P45 in 2022 and annual increase of 4% be changed to 7% beginning 2023.
In report #4, the approved excise tax hike is P2.50 per pack per year on top of current P35/pack until it reaches P45/pack in 2022, then annual increase of 4%.
My 54-page paper, “Assessment of the Sin Tax Reform Act of 2012” was released last Monday Nov. 26 by Stratbase-Albert Del Rosario Institute (ADRi). I made my own estimates of price elasticity of demand (PED) for both alcohol and tobacco products based on estimated retail price (ERP), changes in tax revenues and volume removals. The various estimates of tobacco smuggling are also summarized here (see Table 1).
There was consistent decline in volume removals except in 2015, and consistent rise in ERP, resulting in average PED of -0.31 for 2013-2016. This paper’s estimate is lower than the PED findings of Quimbo, et al (2012) of -0.87 and DoH (2012) of -0.58.
But all three estimates have one conclusion: PED is below 1 and hence, is inelastic, meaning less- or non-price responsive. A 10% increase in the price because of higher taxes did not result in 10% decline in tobacco consumption, only 3% decline as estimated in my paper.
So for tobacco products, the Sin Tax law was successful only in raising more money for the government but a failure in significantly reducing tobacco use.
For alcohol products — beer, wine and distilled spirits — the average PED from 2013 to 2016 is 0.40 (see Table 2).
Both tobacco and cigarettes products exhibited inelastic demand. If government imposes even higher taxes, many smokers and drinkers will simply shift to (a) cheaper legal brands with lower taxes, or (b) cheaper illegal products with little or no taxes. Thus, a potential failure to address high smoking and drinking incidence and at the same time, revenue loss for the government.
Instead of calling for higher sin tax rates, government should focus on significantly controlling smuggled and illicit products that are cheap and readily available. Newton’s 3rd law of motion (for every action, there is an equal opposite reaction) restated — for every government intervention and taxation, there is an equal opposite distortion — seems to apply in our tobacco-alcohol taxation experience.
Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers