Presented by Jo-Ann Latuja, HealthJustice economics researcher

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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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