Philippine Tobacco Tax Reforms: Lessons Learned

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Filomeno S. Sta. Ana III

Executive Director

Action for Economic Reforms

July 2023

Dramatic Gains

1. Steep increase in tax rate.
2. Shift towards unitary taxation one rate for all, regardless of price and brand.
3. Removal of the price classification freeze that protected legacy brans and perpetuated low tax rates.
4. Indexation to inflation.
5. Earmarking of incremental revenue for health programs.

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TAX RATES OF TRADITIONAL CIGARETTES

(in PhP per pack)

• Note:
• Annual increase of 5% starting 2024

Total Tobacco Excise Tax Collection �(2005 - 2019)

Relationship of the increase in sin tax revenues and the increase in health budget

Department of Health (DOH) Budget (1991 – 2020)

Decline in smoking prevalence

A decline of 40.68% between 2003 and 2018.

Decline in smoking prevalence: �34.62% decline between 2009 and 2021

Smoking prevalence: e-cigarettes

Philippine Performance: “Tobacconomics” Scorecard (2012-2018)

First edition of the “Tobacconomics” Cigarette Scorecard (2020), covering tobacco tax policy performance between 2012 and 2018, ranked the Philippines number seven globally in total performance.

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The Philippines ranked number one among all East Asian countries.

Four scoring components, namely:

1. Absolute prices.
2. Changes in price affordability.
3. Share of taxes in retail price.
4. Tax structure.

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Tobacconomics:�ASEAN Performance (2022)

• “In the Tobacconomics Cigarette Tax Scorecard, the average overall score in the countries in the Association of Southeast Asian Nations (ASEAN) is only 1.86 out of 5 points in 2020. This is lower than the global average and most of the World Health Organization (WHO) regions.
• “Out of the four components used to calculate the overall score in the Scorecard, the ASEAN region performed best on tax structure, with an average score of 2.33 points. Still, the tax structure in most of the countries is far from the optimal uniform specific excise tax.

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• “The countries would benefit most from reducing the affordability of cigarettes over time—the average score in that component is only 0.89 points out of 5. In addition to generally low excise tax rates, most countries in the region are not utilizing the best practice of specific taxes that account for inflation and income growth.
• “In ASEAN, the Philippines is the highest performer, with an overall score of 3.63 points, while Cambodia and Lao PDR lag far behind, each receiving only 0.5 points out of 5.”

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Regional Comparison

Summary of Lessons: Sin Tax (2010-12)

• Firm, consistent support of the President.
• Solid core group of government champions in the Executive and Legislative branches.
• Finance Secretary Cesar Purisima, Health Secretary Ike Ona, Internal Revenue Commissioner Kim Henares, Budget Secretary Butch Abad.
• Senator (now Senate President) Frank Drilon, Representative Sid Ungab, Representative (now Transportation and Communication Secretary) Jun Abaya, Representative (now Deputy Speaker) Dina Abad

Main Lessons

• Broadest coalition possible of government champions and civil society. The broad spectrum of civil society encompasses:
• Economic reform groups: Action for Economic Reforms, Foundation for Economic Freedom, University of the Philippines School of Economics faculty.
• Health groups: Philippine College of Physicians, University of the Philippines College of Medicine, Framework Convention on Tobacco Control, Philippines, and others.
• Former senior government officials: former Finance Secretary Gary Teves, former Finance Secretary Ernest Leung, former Health Secretary Espie Cabral, former Health Secretary Quasi Romualdez (deceased), former Economic Planning Secretary Winnie Monsod, former National Treasurer Liling Briones, former Finance Undersecretary Nene Guevara, former finance undersecretary Romy Bernardo.
• Business groups: Makati Business Club.
• Youth groups.
• Tobacco farmers.
• People’s organizations: urban poor and women.

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Lessons

• Framing: Sin tax is primarily a health issue.
• Clear, concrete, creative communication strategy.
• Incentives: Earmarking of the bulk of incremental revenues for universal health care, benefiting local governments and congressional districts; some earmarking for tobacco farmers and alternative livelihood.
• Unity with regard to bottom-line positions (e.g., unitary tax rate, automatic adjustment to inflation, removal of protection to legacy brands, compliance to World Trade Organization rules).

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Main Lessons

• Technical competency, led by the Department of Finance with support from the World Bank, World Health Organization and civil society groups like Action for Economic Reforms, Philippine College of Physicians, and University of the Philippines College of Medicine.
• Smart, bold, unconventional actions, employing a wide range of tactics: pressure politics, art of compromise and tactical alliances, dividing the ranks of those opposing the reforms.

Government and Non-Government Cooperation: Civil Society’s Indispensable Role

• Framing the health issue, which broadened coalition and gained popular support.
• Pushing for the maximum objectives. Crafted a bill on tobacco tax that was even superior to what the Department of Finance (DOF) designed. This bill was later adopted by the DOF, DOH and the Cabinet as a whole. (See later slide.)
• Pressuring politicians: Resignation of pro-tobacco Senator Ralph Recto (the “Recto Morris” slogan) as the Chair of the Senate Ways and Means Committee. Removal of pro-tobacco Congressman Hermilando Mandanas from the chairmanship of the House of Representatives Ways and Means Committee.
• Shaping public opinion through a sharp and clear communication strategy, employing traditional and new media. (See later slide.)
• Addressing the coordination problem between government and other stakeholders as well as within government.

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Comparing the original DOF bill (Limkaichong), the AER bill (Abad),

and RA 10351 (final outcome) on tobacco taxation

Illustration: AER’s sin tax communication strategy

• Protect the young and the poor.
• Seven wins:
1. A win for the poor.
2. A win for the youth.
3. A win for health.
4. A win for the economy.
5. A win for tobacco farmers.
6. A win for politicians and governance.
7. A win for the future.

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Built-in attributes of civil society organizations (CSOs)

• Freed from bureaucratic constraints, thus having the mobility and flexibility to quickly respond to ever-changing conditions.
• Can be assigned sensitive tasks that government has difficulty executing, including intelligence work, playing bad cop, facilitating talks, and the like.
• Additional resources (human, intellectual, logistical) to carry out an all-round campaign.
• Informal networks.

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An Illustration: Action for Economic Reforms (AER)

• Leading civil society organization in the sin tax campaign.
• Founded in late 1996; composed of progressive and activist economists, academics, scholars and public intellectuals.
• Focused on tax reforms, other macroeconomic issues, and good governance and institutions.
• Has extensive links with (civil society and political) movements, academe, government career officials, and politicians.

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AER and the Sin Tax

• Participated in various tax reform efforts, and collaborated with other reformers, including those in government.
• Learned painful lessons from the defeat of sin tax reforms in 1997 and 2004.
• Has been working with DOF since its founding in 1996 and has thus earned the DOF’s trust.
• Has good relations with reformers in the administration.

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Concluding Message

• The conventional thinking is that civil society organizations are critical of or skeptical of government.
• But the sin tax campaign leading to the historic 2012 legislation showed that civil society can be harnessed to work with government for the public interest; that it has the capacity to make things happen.

Concluding Message

• Government will encounter challenges and difficulties in securing major reforms—resistance from highly organized and resource-rich vested interests, possible hostile public opinion, collective action problems, and the like.
• Government benefits from harnessing the potentials of civil society to help address such difficulties.
• Ultimately, ownership of reforms is broadened and strengthened.

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References

Booth, David (2014). Aiding Institutional Reform in Developing Countries: Lessons from the Philippines on What Works, What Doesn’t and Why. Working Politically in Practice Working Paper 1. San Francisco, CA and London: The Asia Foundation and ODI.

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Kai Kaiser & Caryn Bredenkamp & Roberto Iglesias (2016). "Sin Tax Reform in the Philippines," World Bank Publications - Books, The World Bank Group, number 24617, December.

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Philippines, Republic of the (2012). Republic Act No. 10351. An Act Restructuring the Tax on Alcohol and Tobacco Products.

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Pilippines, Republic of the (2017). Republic Act No. 10963. Tax Reform for Acceleration and Inclusion. (TRAIN).

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Sidel, John T. (2014) ‘Achieving Reforms in Oligarchical Democracies: The Role of Leadership and Coalitions in the Philippines’. Research Paper 27. Canberra: DLP. 

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Sta. Ana, Filomeno III, Angeli Vigo, and Jeremias Paul (2022). ”The Role of Civil Society in Tobacco Tax Reform in the Philippines.” In Health Taxes: Policy and Practice (eds: Jeremy A. Lauer, Franco Sassi, Agnes Soucat and Angeli Vigo). World Scientific Publishing Europe Ltd. Copyright World Health Organization.

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Tobacconomics (2021). Policy Brief: “Cigarette Tax Scorecard: Spotlight on ASEAN.” Institute for Health Research and Policy, University of Illinois at Chicago. https://tobacconomics.org/files/research/689/asean-policy-brief-final.pdf. April.