Slowing down TRAIN

The Tax Reform for Acceleration and Inclusion (TRAIN) is envisioned as a long-term reform program. It aims to generate revenues to finance AmBisyon Natin 2040, which expresses the aspirations of the people for the next 25 years. It fixes the systemic flaws in the tax system and simplifies taxation. It also makes those who have the capacity to contribute more and to relieve those who don’t.

The House of Representatives has passed a flawed bill but is still acceptable to meet the above goals. But the version of the Senate Committee on Ways and Means (SB 1592), is very diluted. The revenue it can generate is most insufficient, almost cut by half from the original version submitted by the Department of Finance.

The House version of TRAIN (HB 5636) is estimated to generate around P119.4 billion from the combination of personal income tax reduction, VAT (value-added-tax) base expansion, fuel excise tax adjustment, automobile excise tax adjustment, taxation on sugar-sweetened beverages, and some tax administration reforms. The Senate Committee Report, prepared by Senator Sonny Angara, drastically cuts potential revenues by half — to P59.9 billion even after last minute insertions such as tax on cosmetics procedures and a coal tax. The amount of P59.9 billion is even a conservative estimate because not factored in is the revenue loss from the Angara proposal to have a zero rating for services rendered to entities registered with the free ports and special economic zones.

Obviously, this translates into almost nothing to finance “Build Build Build” — the flagship campaign supposed to kick-start the Philippines’ Golden Age of Infrastructure. Education and health will also be deprived of resources.

In fact, the revenue to be generated from the Angara bill will not be even enough to finance free college education, which he and his fellow senators voted for, after reducing from additional revenue the amount that will go to the cash transfers for the poor (approximately P36 billion). For next year, the Department of Budget estimates that free college education will cost P51 billion.

What are the principal reasons behind the drastic cut in potential revenue in the Senate version?

First, the Senate Committee Report keeps many exemptions on the value-added-tax.

The House originally proposes scrapping over 80 special VAT laws, of which the Senate Reports retains around 30 items. As a result, potential VAT revenues in senate’s TRAIN will lower than the House version by 77%. On top of this, as stated earlier is the inclusion of a zero rating for services rendered to the firms registered in the special economic zones and free ports.

Hence, under the Senate Committee Report version, the VAT system will remain porous and unfair.

Second, the Senate Committee report reduces the potential fuel excise tax revenues by 46%. Contrary to popular opinion that gasoline and diesel taxes are the most diluted in the Senate version, it is aviation fuel that constitutes the largest compromise. The House version proposes a graduated increase to P10 per liter from the current P3.67 per liter, but the Senate Committee report only increases the rate to P4 per liter.

Whose interests are being protected here? The richest 10% of Filipino households spends over three times the combined expenditure of the rest of the population for airfare.

In 1997, fuel excise tax accounts for around 0.3% of the income of the richest 10% of Filipino households. After two decades of having a fixed specific rate since 1997, with diesel later even having zero excise tax, the richest 10 percent is consuming more fuel but the consumption is only equivalent to 0.1% of their income.

Third, the income tax rate for the ultra rich (those with annual income greater than P5 million) is increased to only 32% rather than 35% as proposed in the House bill.

The House Committee Report makes some concessions to the poor like a higher cash transfer for the poor (P300 compared to P200 in the House bill) and the exclusion of kerosene from further tax increase. But these are token measures and populist symbols. The cash transfer of P300 from the poor is but populist, given that the amount of P200 proposed by the Department of Finance and the House bill is more than enough to compensate for the price increase that the poor will shoulder arising from the slight increase in consumption taxes. Still and all, the biggest gainers from the big compromises on VAT, fuel, and automobiles taxes are still those who have the ability to pay.

In conclusion, the Senate Committee Report not only slashes the revenues that can be generated for pro-poor spending. But it has made severe compromises that favor the rich and those with ability to pay. It is no longer an investment in the future, it no longer serves the people’s aspirations embodied in AmBisyon 2040.

Madeiline Joy Aloria is a researcher for the Fiscal Reform team of Action for Economic Reforms (AER).