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Inflation and sin taxes

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In its latest economic bulletin, the Department of Finance (DOF) disclosed that the faster rate of price increases of the so-called “sin products” were mainly responsible for pushing the Philippines’ consumer price index (CPI) higher in the first quarter of 2018.

J. Albert Gamboa

J. Albert Gamboa

The country’s inflation rate recorded a five-year high of 4.3 percent year-on-year last month, up from the revised level of 3.8 percent in February, based on data from the Philippine Statistics Authority (PSA).

This, as the Tax Reform for Acceleration and Inclusion (TRAIN) Act went into force starting January 1, 2018 while the PSA has revised the inflation index with 2012 as the new base year in order to provide more accurate market signals.

According to the PSA, rebasing of the CPI is done every six years to reflect a more realistic household consumption behavior as well as economic, social, and technological changes that may have influenced the Filipinos’ tastes and preferences.

Inflationary pressure came from elevated food prices due to the absence of NFA rice, rough seas limiting fish supply, and bad weather affecting vegetable production. Non-alcoholic beverages, specifically sugar-sweetened ones, also became more expensive after getting slapped for the first time with excise taxes courtesy of the TRAIN law, along with petroleum products. As a result, the hardest hit were the oil distribution and restaurant industries.

Meanwhile, “sin taxes” on tobacco and alcoholic beverages rose further this year and contributed greatly to pushing up the overall pace of inflation. The DOF said “appropriate adjustments in prices of sin products, tobacco specifically, will continue to fuel inflationary momentum in the near term.” This is in line with the government’s thrust to discourage the consumption of these products through higher prices.

Prior to the passage of Republic Act No. 10351, otherwise known as the Sin Tax Reform Law of 2012, there was a 50:50 ratio in the tax burden imposed on alcohol and tobacco products. However, the sharing became 65% for tobacco and 35% for alcohol by 2016. The gap will further widen with the increase of cigarette excise taxes starting January, 2018 and with no increase in alcohol excise taxes this year.

Among the 10 ASEAN member states, the Philippines had the most expensive cigarettes in 2016. With higher sin taxes for tobacco this year, they will even be less affordable as tobacco inflation reaches double-digit levels. Compared with other excisable products, tobacco excise taxes are the biggest contributor to the national economy in terms of revenue, and they are indexed at a much higher rate than alcohol.

Over the years, the taxes imposed on cigarettes have helped in achieving the government’s goal of curbing its consumption. This is contrary to allegations that the Philippines is not serious in reducing tobacco use.

At the rate cigarette pricing has risen, the level may already be too high to absorb another round of tax-driven price hikes. Under this scenario, smuggling might become more prevalent.

In the spirit of fair trade, any new tax increase should first be imposed on alcohol. This would restore the pre-sin tax ratio of equal burden sharing. Why pick on only one industry and exempt other equally “sinful” products?

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