Illicit trade and tobacco taxation

While waiting for the full year 2025 cash operations report (COR) of the Bureau of the Treasury (BTr), I checked the data from January-November 2025. The budget deficit is P1.26 trillion and since National Government disbursements in December reached around P600 billion while revenue was around P300 billion, the full year deficit may reach P1.56 trillion.

The bulk of our budget deficit comes from interest payments alone, an average of P1.7 billion/day in 2023; P2.1 billion/day in 2024; and P2.4 billion/day in 2025. New financing or net borrowings were P1.45 trillion in the first 11 months of 2025 (see Table 1).

TOBACCO SMUGGLING
Recently I noticed that there have been many reports on tobacco smuggling. Look at how many stories on the topic came out in the Philippine Star this month alone: “P1.5 billion smuggled cigarettes found in Malabon” (Jan. 2), “3 nabbed over P21.2 million smuggled cigarettes” (Jan. 7), “Cops seize P97.4-M worth imported cigarettes in Maguindanao del Norte” (Jan. 8), “P100.57 million smuggled cigarettes seized in Bataan” (Jan. 11), “P20 million worth of smuggled cigarettes seized by cops” (Jan. 12), “Security officers tagged in illegal cigarette trade” (Jan. 20), “House to probe pols over cigarette smuggling” (Jan. 22), “Gatchalian wants Senate probe on tobacco smuggling” (Jan. 23), “BIR seizes P516 million illicit cigarettes; Senate eyes probe” (Jan. 25), “Running after smugglers” (“Commonsense” opinion column by Marichu A. Villanueva) Jan. 23, and the Jan. 26 Editorial, “Get the smugglers” (Jan. 26).

Kudos to actions by Customs Commissioner Ariel F. Nepomuceno and Bureau of Internal Revenue (BIR) Commissioner Charlito Martin R. Mendoza, and to the investigations made by Representative Miro S. Quimbo, the Chair of the House Committee on Ways and Means, and Senator Sherwin T. Gatchalian, the Chair of the Senate Committee on Finance.

Mr. Quimbo cited the calculations of both the BIR and Customs Bureau that in 2025, there were revenue losses of P44.8 billion from cigarette smuggling across the country.

Mr. Gatchalian believes that “Tobacco smuggling can only happen with collusion between politicians and law enforcement agencies.”

I believe that the decline in the amount from tobacco tax revenues coincided, or is directly caused by a consistent rise in the tobacco tax rate — from P50/pack that yielded P176 billion in tobacco tax revenues in 2021, to P63.20/pack that yielded only P134 billion in 2024. Meanwhile, tax collections from alcohol, sugar-sweetened beverages, mining, and automobiles have been either flat or rising somewhat (see Table 2).

Ordinary and poor smokers will not buy the legal cigarettes at P100/pack or more because the tax alone is already P66.20/pack. They will instead shift to smuggled cigarettes at P50/pack or less because the tax is zero. The BIR and Department of Finance get nothing from the smuggled cigarettes to help finance public expenditures.

Reports or “studies” that claim “illicit tobacco trade is as low as less than 1% in Metro Manila cities” are not accurate and here are two pieces of proof.

One, during the Senate Committee on Finance public hearings chaired by Senator Gatchalian in March and May 2025, on both instances he instructed his staff to buy smuggled tobacco in Quiapo. Within an hour, the staff members returned with many reams of illicit products, saying that those goods were easy to buy, cheap, and were openly displayed and not hidden. Mr. Gatchalian displayed the newly bought illicit tobacco to all participants of the Committee hearing, including the health activists and physicians who were repeatedly arguing that the amount of illicit tobacco is small and exaggerated.

Two, I personally saw such illicit products being sold when I walked along Ongpin St. in Binondo, Manila about two years ago to check out some jewelry for my daughter. I saw a girl, who looked about high school age, openly displaying reams of cigarettes that were obviously 100% illicit because they were (a.) cheap, P60 or less if you bought more at a time (2024) when the tax rate was already P63/pack; (b.) the packs had no graphics warning; and, (c.) many sported Chinese characters. The young girl’s “stall” was less than 100 meters from a nearby police station and barangay outpost.

The BIR and Finance department could collect P176 billion/year or more, not just P134 billion/year, from tobacco and help reduce the deficit and borrowings. How? I can think of two ways.

One, reduce the price differential between legal and illegal cigarettes by bringing the tax rate back to P60/pack or less, reducing the temptation of smokers to patronize illicit tobacco where government tax collection is zero.

Two, for vapes and heated products, reduce the opportunity for tax dodging by having a low single rate or just two rates with low differential between the two rates.

The government should focus on controlling crime — murder, robbery, destruction of property, abduction, and rape — acts that harm other people. The government should step back from controlling people’s actions that do not harm others except themselves — high-speed downhill cycling, climbing tall trees, sedentary living, drinking, smoking, vaping, consuming fatty-oily-sugary food and drinks, and so on. Allow for more personal and parental responsibility to protect personal and public health.

Bienvenido S. Oplas, Jr. is the president of Bienvenido S. Oplas, Jr. Research Consultancy Services, and Minimal Government Thinkers. He is an internationa fellow of the Tholos Foundation.