One of the major divers of tax reform is Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, signed in December 2017 and taking effect on January 1, 2018. The TRAIN Law’s promises and objectives were multifaceted.
Under the law, excise taxes were increased on automobiles, tobacco, and petroleum products to push for a sustainable future. Sweetened beverages were also slapped with excise taxes to combat diseases and health concerns stemming from excessive consumption.
Further, personal income tax brackets were revamped by removing the personal exclusions and lowering the graduated income tax rates — a radical change.
Revenue generated from TRAIN was used to fund big-ticket infrastructure projects and social programs such as unconditional cash transfers to those below the poverty line.
Since the law passed over six years ago, a global pandemic has overturned our lives, prices of basic goods and services have risen in an inflationary economy, war has broken out, and markets all over the world have experienced recession. Over six years have been spent on board this TRAIN. What has the effect been on the average Filipino as regards the lowering of personal income tax rates and the increase in excise taxes on fuels and sweetened beverages?
FIRST STOP: DISPOSABLE INCOME
Prior to TRAIN, individual income tax rates were set between 5% and 32% based on a graduated income table ranging from P10,000 to P500,000. Computing for individual income tax back then also included accounting for the number of dependents, which was at a maximum of P100,000 per individual. Under TRAIN, individual income taxes have been homogenized regardless of the individual’s civil status or number of dependents. As such, the individual income table was updated to between P250,000 and P8 million, while graduated income tax rates have been amended to between 0% and 35%, with changes in basic tax rates in two tranches — the first one in 2018 and the second in 2023. Mixed-income earners also got the option to pay taxes at 8% per year in lieu of the graduated income tax rates and business taxes under the new law, subject to certain conditions.
TRAIN increased the take-home pay for individuals and was touted as a progressive method of reducing income taxes for lower-income earners while increasing taxes for higher-income earners. With the higher disposable income for most individuals, it was predicted that demand for goods and services would increase since people would now have more money to spend. On the other hand, this new tax regime is meant to ease tax collection and enhance revenue generation.
A 2022 study by Feniz et al. for the Journal of Economics, Finance, and Accounting Studies found that TRAIN brought about a positive impact on buying power due to the increase in disposable income. The study even went on to say that the higher disposable income may increase potential savings, but they were unable to do so since the money intended for savings was spent to buffer increased household costs. The TRAIN Law had undesirable effects related to a stable and even worse living situation since the increase in income was countered by the increase in prices of goods and services.
As such, the gains earned from TRAIN have been offset by higher monthly expenses.
Further, an August 2019 analysis by Rappler showed that the added excise taxes may have a negative impact on minimum wage earners (MWEs) and those in the informal sector. Since MWEs are not taxed in the first place, the added excise taxes will deplete their disposable incomes even more.
While it is true that the TRAIN Law provided for a higher disposable income for individuals, the same was also offset by the rising prices of goods and services.
SECOND STOP: THE EXCISE TAX ON FUEL
The TRAIN Law also featured excise taxes on petroleum products, including an increase to P2.50-P6 per liter of diesel fuel (previously excise tax-free) and an increase to P7-P10 per liter of gasoline (previously at P4.35 per liter). The intended effect of these excise taxes is to promote more sustainable and environmentally friendly ways of motoring to make commuting a viable option.
We should remember, however, that fuel and coal are also used for commuting and for many other uses in our everyday lives. According to London-based think tank Ember, the share of coal in the Philippines’ power generation mix in 2023 was 61.9%, higher than the 59.1% posted in 2022. An October 2019 simulation by Castillo et al., published by the Philippine Institute of Development Studies (PIDS), found that poverty incidence increased when the prices of goods and services also increased due to the increase in the excise tax on fuel, with farming being affected the most. Further, the simulation also showed that the excise tax on fuel has contributed to a decline in employment, with the agricultural and industrial sectors being the most affected due to weaker economic activity.
In 2022, the Philippines also saw its highest spike in fuel prices, with diesel prices peaking at P84 per liter, with ripples continuing to be felt in 2023. Fuel price watchdogs and stakeholders have since requested the administration suspend the excise tax on fuels. Under Revenue Regulations No. 2-2018, the government has the power to suspend the scheduled increase in excise taxes when the Dubai crude oil benchmark hits $80 per barrel. The Department of Finance, however, has yet to implement a suspension, noting the P41.4 billion in foregone revenue that would otherwise go to social programs and infrastructure.
Since we are still largely dependent on coal, the excise tax on that fuel remains a big component of our spending. Consequently, the excise tax on other fuels may have a continued impact on poverty incidence, unemployment, and inflation.
THIRD STOP: SUGAR TAXES
The TRAIN Law also imposed an excise tax on sweetened beverages. Previously tax-free, a liter of beverage using caloric and non-caloric sweeteners may cost individuals an added P6, with beverages containing high fructose corn syrup costing at least P12 more. According to the World Bank, taxes on sweetened beverages may incentivize individuals and businesses alike to manufacture and consume more health-conscious products.
This was proven by simulation in a February 2019 study conducted by Saxena et al. for the US National Library of Medicine (NLM). According to the simulation, the excise tax on beverages could avert 913 deaths related to diabetes, 10,339 deaths from ischemic heart disease, and 7,950 deaths from stroke over 20 years and could potentially help the government save an estimated P31.6 billion in estimated healthcare costs.
However, a separate 2019 study conducted by Onagan et al. also published by the NLM found that average prices of sweetened beverages increased 16.6% in supermarkets, with carbonated non-alcoholic drinks having the highest spike at 21% during the first year of TRAIN’s implementation. To maintain sales, manufacturers have enhanced marketing measures and resorted to packaging products in smaller portions.
Ideally, when prices of goods increase, the demand for them decreases; such was the intended effect of the sugar tax. Recently, however, the Congressional Policy and Budget Research Department of the House of Representatives found that this intended effect did not exactly take place, noting a consumption growth rate for these products at 4.2% during the pandemic, accelerating to 4.4% in 2023. The think tank later went on to acknowledge that the health benefits intended by this sugar tax were only good for the short term.
In a country where sari-sari stores and ambulant food vendors never run out of sweetened beverages such as sodas and juices, raising excise taxes therefrom may contribute to a healthier Filipino. However, while sugary drinks have increased in price due to an increase in excise taxes, manufacturers have sold them in more affordable, albeit smaller, packaging, and consumers continue to patronize these products, especially when they are more affordable than healthier options.
WHERE IS THIS TRAIN HEADING?
The intentions of the legislature in implementing the TRAIN Law were promising. The law provided for progressive taxes on individuals; any collection therefrom, especially from new or added taxes introduced, would boost infrastructure projects and social programs, not to mention the intended effects of taxes on automobiles and tobacco that were not discussed in this article. Nonetheless, it is important for legislators and stakeholders alike to be in constant dialogue to discuss and revisit whether the intended effects have been met.
During these discussions, several questions may arise, such as:
How can we counter the inflationary impacts of rising fuel prices and goods when consumers are supposedly receiving more disposable income?
The answer may not emerge from a purely fiscal perspective. It may require government intervention to counter inflation — raising minimum wages, and raising interest rates to curb consumer spending. Price controls have been implemented in recent times. Nonetheless, inflation persists. In which case, social amelioration programs may be revisited to make them more inclusive of those greatly affected by inflation.
If fuel prices are so high, how about trying to commute?
This is easier said than done. In most cities, public transportation is difficult, especially with recent moves by the government to overhaul the jeepney industry. The answer may lie in providing more incentives to businesses and employers planning to set up in the countryside, a move introduced by the Corporate Recovery and Tax Incentives for Enterprises Law, whose effects we are yet to see. Moreover, if high fuel prices continue to haunt us, it is probably time to push for more sustainable and low-cost initiatives to power generation and consumption.
If sugary drinks are expensive, how about healthier options?
Again, easy to say, difficult to do. Since healthier food and drink options are only affordable to the middle class and higher, low-income earners have little to no option but to buy what is accessible, most of which are unhealthy. We may also need to revisit subsidizing healthy food and beverage products for those who need them, rather than giving them cash.
In recent years, we have seen more discourse on tax reform, but only among corporate and institutional taxpayers. Ultimately, it is impossible to discuss the effects of tax legislation without considering the economic impact on individuals. All of us citizens have no choice but to ride on TRAIN, yet it is also equally important to inform the train conductors — our legislators and leaders — where we wish to go. Are we aligned on the goal of making taxes more equitable for citizens and government, and will our travels bring us to inclusive economic empowerment?
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Joen Jacob G. Ramas is a manager of the Tax Advisory & Compliance division at Cebu office of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
pagrantthornton@ph.gt.com
