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Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
Impact Assessment of Tobacco Tax Increase
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Impact Assessment of Tobacco Tax Increase

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Presented by Jo-Ann Latuja, HealthJustice economics researcher

Presented by Jo-Ann Latuja, HealthJustice economics researcher

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  • 1. 5/11/10   RAISING TOBACCO TAX IN THE PHILIPPINES OUTLINE I.  Rationale in increasing tobacco tax II.  General view on raising tobacco tax III.  Legislative history of excise tax IV.  Weaknesses of the current excise tax structure V.  Sin tax bills VI.  Health and revenue goals 1  
  • 2. 5/11/10   RATIONALE   Tobacco epidemic is one of the greatest public health threats of modern times. Total population of smokers are expected to reach 1.6 billion by 2025.   Despite tobacco control efforts, smoking prevalence in the country remains high.   Studies show that increasing tobacco taxes is one of the most effective means to reduce consumption. GENERAL VIEW   Framework Convention on Tobacco Control, Article 6 recognizes that the price and tax measures are effective and important means of reducing tobacco consumption by various segments of the population.   World Bank recommends tax that is two-thirds to fourth fifths of the retail price of tobacco products 2  
  • 3. 5/11/10   LEGISLATIVE HISTORY – EXCISE TAX   NIRC – CA 466   RA 8424 (1997)– mixed specific/ ad valorem tax system   RA 9337 (2004)- retained the four-tiered system set by RA 8424 WEAKNESSES OF THE CURRENT EXCISE TAX STRUCTURE   Multi-level Specific Excise Tax Structure   Price Classification Freeze   No price indexation 3  
  • 4. 5/11/10   SIN TAX BILLS   HB 3759   Seeks to impose a uniform excise tax rate of P14 per pack   HB 6079   Unitary tax for each category of tobacco and alcohol products   HB 4951   Restructure the excise tax on alcohol and tobacco products and earmarking portions of incremental revenue resulting from the tax to fund vital health programs of the government. HEALTH AND REVENUE GOALS   Health Goal   Reduce cigarette consumption by 10% (DOH)   Revenue Goals   Raise additional revenue   Simple and equitable excise tax structure   Use tax to internalize the negative externality of cigarette consumption 4  
  • 5. 5/11/10   MEASURING IMPACT OF CIGARETTE TAX INCREASE OUTLINE I.  Brief background on studies measuring price elasticity of demand for cigarettes II.  Measuring impact on revenue based on the DOF estimated elasticity III.  Measuring impact on consumption based on the UPSE and DOH estimated elasticity IV.  Measuring impact on health costs 5  
  • 6. 5/11/10   STUDIES MEASURING PRICE ELASTICITY OF DEMAND FOR CIGARETTES Study DOF UPSE and DOH time series cross sectional Data (aggregate level) (household level) Price country CPI on regional average Data tobacco price Estimated -0.52 to -1.09 -0.235 Elasticity (Average = -0.87) STUDIES MEASURING PRICE ELASTICITY OF DEMAND FOR CIGARETTES Study DOF UPSE and DOH o  Data closer to individual level data o  Captures variable o  Controls for household Strength changes over the characteristics course of time o  Elasticity is income class-specific o  Estimated o  Prices used are regional elasticity may be averages Weakness underestimated or overestimated o  Does not capture variable changes over time 6  
  • 7. 5/11/10   STUDIES MEASURING PRICE ELASTICITY OF DEMAND FOR CIGARETTES   Recommendations to improve estimation of price elasticity of cigarettes   For time series data   Need to extend data as far as 1970   Separate estimations may be done for each price classification   For cross-sectional data   Need to obtain data on cigarette price faced by household   A difference-in-difference (DID) model using pooled cross section data may be used IMPACT ON REVENUE (DOF ELASTICITY)   Limitations   Base period: 2008   Retail price: average of cigarette price data from NSO (excludes retail price of imported brands)   Excise tax per pack: average of excise taxes   Cigarette consumption: based on data on removals from BIR (data on premium-priced not available)   Assumptions   Effective tax collection   No shifting of brands   Level of smuggling does not change 7  
  • 8. 5/11/10   IMPACT ON REVENUE (DOF ELASTICITY) Proposal First Year Estimated Suarez Bill World Bank (65% LacsonBill Impact (Uniform PhP of retail price = (two-tiered) 14.00) PhP 30.00) Increase in Excise Tax 9B 31 B 67 B (in PhP) Increase in Excise Tax as 0.13% 0.42% 0.91% % of 2008 GDP 2008 budget for 2008 budget for 50% of 2008 DOH and 50% DOH and DA and Equivalent to budget for of 2008 budget 50% of 2008 SCUs for SCUs budget for SCUs IMPACT ON CONSUMPTION (UPSE AND DOH ELASTICITY)   Limitations   Base period: 2008   Retail price: average of cigarette price data of top brands available per price band from NSO (excludes retail price of imported brands)   Excise tax per pack: according to price band   Cigarette consumption: based on data on removals from BIR (data on premium-priced not available)   Assumptions   Price elasticity corresponds to price band   Effective tax collection   No shifting of brands   Level of smuggling does not change   Decrease in smoking prevalence: 10% decrease in consumption translates to 1% decrease in smoking prevalence in the medium term 8  
  • 9. 5/11/10   IMPACT ON CONSUMPTION (UPSE AND DOH ELASTICITY) Proposal Estimated World Bank (65% Suarez Bill Impact LacsonBill of retail price = (Uniform PhP (two-tiered) PhP 28.00 to 14.00) PhP 40.00) Decrease in Consumption 1.42 B 2.85 B 4.23 B (in packs) % Decrease in 29.98% 60.19% 89.40% Consumption Decrease in Smoking 3.00% 6.02% 8.94% Prevalence IMPACT ON HEALTH COSTS Summary of Economics Costs in US$ for Four Smoking-Related Diseases, 2003* ($1 = PhP 52) Method Peto-Lopez SAMMEC Lung Cancer 76,074,756 202,306,009 Cerebro-Vascular 961,417,548 3,476,758,951 Disease Coronary Artery 1,267,531,634 1,638,647,686 Disease Chronic Obstructive 550,144,348 728,135,692 Pulmonary Disease ALL 4 DISEASES 2,855,168,287 6,045,848,339 * Tobacco and Poverty Project in the Philippines, 2006 9  
  • 10. 5/11/10   IMPACT ON HEALTH COSTS   Limitations   Based on 2003 estimates   Decrease in health costs derived from estimated decrease in smoking prevalence using UPSE and DOH elasticity   Assumption   Health cost is directly related to smoking prevalence. Magnitude of which is arbitrarily determined. IMPACT ON HEALTH COSTS Projected Private Health Cost Savings in PhP for Four Smoking-Related Diseases Proposal World Bank (65% Assumption Suarez Bill LacsonBill of retail price = (Uniform PhP (two-tiered) PhP 28.00 to 14.00) PhP 40.00) %Dec in Cost = 1/2 of %Dec in Smoking 2.23 – 4.72 B 4.47 – 9.46 B 6.64 – 14.05 B Prevalence 2008 budget 2008 budget for 2008 budget for for food for housing and NFA, housing and Equivalent to school food for school food for school program program program %Dec in Cost = 1/4 of %Dec in Smoking 1.11 – 2.36 B 2.23 – 4.73 B 3.32 – 7.03 B Prevalence 50% of 2008 2008 budget for 2008 budget for budget for food Equivalent to food for school NFA and food for for school program school program program 10  
  • 11. 5/11/10   SUMMARY We must recognize   DOF customarily makes a projection of Revenue   DOF mandate is to increase revenue as much as possible to meet a balanced budget   DOH (through NEC, UPManila, UPSE studies) developed a process to project Reductions in Smoking Prevalence and Health Costs   The latter still needs to be done   DOH indicated a possible target of 10% reduction in Consumption during a TWG ( No specific target stated in the National Health Objectives of 2005-2010) IMPACT ANALYSIS: HEALTH VIEW Proposal Uniform World Bank Estimated LacsonBill Specific Suarez Bill (65% of retail Impact (two- Tax (Uniform price = PhP tiered) = PhP PhP 14.00) 28.00 to 10.00 PhP 40.00) Reduction in Smoking Prevalence 3.00% 3.64% 6.02% 8.94% Based on DOH computation Number of Years to reach 10%* 3.3 2.7 1.6 1.1 target * 10% discussed in TWG and based on National Health Obj Target 2005-10 11  
  • 12. 5/11/10   IMPACT ANALYSIS: REVENUE VIEW Proposal Uniform World Bank Estimated LacsonBill Specific Suarez Bill (65% of retail Impact (two- Tax (Uniform price = PhP tiered) = PhP PhP 14.00) 28.00 to 10.00 PhP 40.00) Impact on revenue based on DOF elasticity 9B 17 B 31 B 67 B (PhP) Impact on revenue based on UPSE & DOH 8B 3B -1 B -10 B elasticity (PhP) HIGHLIGHTS   To follow WB recommendation (tax should be 65% of Retail Price), a minimum of P28 increase in excise tax should be applied*   DOH Target will likely be achieved in the short-run (in 3 years), based on their computations, if the Suarez Bill or the World Bank recommendation will be adopted   However, although revenue projections based on the DOF elasticity are always positive, revenue projections based on the UPSE and DOH elasticity are negative for the Suarez Bill or WB recommendation. Hence, the need to compute the optimal tax level. * VAT is excluded in the 65% computation 12  
  • 13. 5/11/10   CONCLUSION   Increasing cigarette tax has great potential in:   Improving fiscal balance through increased excise tax revenue   Reducing consumption of cigarettes   Decreasing private health costs due to smoking- related diseases   Optimal tax level can be achieved by striking a balance between achieving health and revenue targets in the short run. REMOVING THE PRICE CLASSIFICATION FREEZE An Alternative Proposal 13  
  • 14. 5/11/10   LIMITATIONS   Base period: 2006   Cigarette brand volume shares based on 2006 Euromonitor data   Retail price: average of cigarette price data per brand from NSO   Excise tax per pack: according to price band as indicated in Annex D of RA 8424   Cigarette consumption: based on data on removals from BIR (data on premium-priced not available)   Brands selected based on availability of volume share, 1997 price classification and price data ASSUMPTIONS   Price elasticity corresponds to price band (UPSE and DOH elasticity used)   Effective tax collection   No shifting of brands   Level of smuggling does not change 14  
  • 15. 5/11/10   SELECTED BRANDS 1997 2006 2006 Price Band Brands Volume Price Band (RA 8424, Share (Estimated) Annex D) Marlboro 26.10 % High Premium Winston 20.20 % Medium Premium Camel 6.00 % Low Premium Philip Morris 0.80 % High Premium Fortune 0.40 % Low High Total Volume 53.5 % Share IMPACT OF PRICE CLASSIFICATION FREEZE REMOVAL Decrease in Brands Revenue Increase Consumption Marlboro 44.55 % 33.93 % Winston 78.82 % -16.62 % Camel 100.00 % -100.00 % Philip Morris 42.79 % 38.18 % Fortune 96.68 % -82.84 % % of Total 22.65 % 10.72 % In unit terms 1.05 B packs PhP 2.81 B 15  
  • 16. 5/11/10   REMOVING PRICE CLASSIFICATION FREEZE   Although estimates refer only to 50% of the total market has the effect of decreasing approx 20% of consumption in the 50% of the market ( using UPSE price elasticity) unless the smokers shift to cheaper brands   Can increase revenue by at least P2B   Can be done by simply repealing the “Protection Clause” for existing brands under the RA9334 CONCLUSION   Removal of price classification freeze per se creates:   Additional excise tax revenue   Substantial reduction in consumption of cigarettes and health costs due to smoking-related diseases   However, other issues still remain:   Difficulty in administering taxes due to 4-tiered classification   Brand substitution would still be rampant   Reduction in consumption is still less than reduction in consumption if excise tax is uniform specific 16  

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