Sin Tax Reform in the Philippines
The 2012 Philippines Sin Tax Law (STL) brought about long-overdue reforms to tobacco and alcohol taxation to promote better health, improve financial sustainability, and good governance. The STL greatly simplified and increased excise taxes, especially on cigarettes. In 2012, cigarettes were widely sold at apiece or even less—an amount equivalent to a couple of U.S. cents. Falling real taxes and growing incomes in the Philippines meant that tobacco and alcohol products were widely accessible and affordable. The prevailing excise regime had resulted in a significant decline in revenues, from 0.9 percent of gross domestic product (GDP) in 1997 to under 0.5 percent of GDP in 2012.
This is equivalent to “losses” of over $2.5 billion per year in 2012 terms. The excise regime granted special low grandfathered rates to certain cigarette producers, suffered from a lack of inflation indexing, and fostered an increasingly monopolistic market. The multiple excise tiers—which varied by price—created the temptation for downshifting (reclassification) to lower price tiers to avoid taxes. The taxation of spirits, meanwhile, was being challenged by the international community in the World Trade Organization for allegedly being overtly discriminatory by favoring a few major local producers.
The STL raised and simplified tobacco and alcohol excises, increasing government revenues and reducing smoking. After only one year of implementation, excise tax collections from tobacco and alcohol products shot up to approximately ₱103.4 billion ($2.44 billion), an increase of more than 86 percent from the previous year’s collections of ₱55.7 billion ($1.25 billion). In 2015, total sin tax collections reached ₱141.8 billion (over 1 percent of GDP), with tobacco accounting for ₱100 billion. Retail prices for cigarettes increased significantly because of the reform, prompting consumers to cut down and even stop smoking, with early data suggesting some declines in smoking prevalence.
The reform scaled up health care financing, nearly doubling the Department of Health’s (DOH) budget in its first year of implementation and financing the extension of fully subsidized health insurance to the poorest 40 percent of the population. From 2013 to 2014, the number of poor and near-poor families enrolled in the National Health Insurance Program increased from 5.2 million to 14.7 million. This grew to 15.3 million by end-2015, almost tripling the coverage of the poor and near-poor. Sin tax revenues were also subsequently used to subsidize the insurance coverage of senior citizens, further expanding access to care among the vulnerable. By 2016, the DOH budget was triple its 2012 level (in
nominal terms), reaching ₱122.6 billion.
The STL strengthened governance arrangements on the tax and expenditure sides. This was done through the simplification of tax rates (for example, moving to a unitary excise tax); by promoting greater transparency and accountability in the allocation of health insurance subsidies by using an existing official poverty-targeting mechanism; and by mandating annual accountability reports on the implementation of the STL by all concerned agencies to the Congress of the Philippines.
Although the initial impact of the STL was felt immediately, it is a multi-year transition to a new tax regime, and its full implementation stretches to 2017 and beyond. By 2017, all cigarettes will be subject to a single unitary excise tax of ₱30 ($0.70) per pack after a quadrupling of the lowest excise tax tier of ₱12 in 2013 from ₱2.72 in 2012. After 2017 the excise tax will be increased automatically by 4 percent per year. Higher cigarette prices should improve population health by curbing smoking. The STL retained revenue earmarking for tobacco-growing regions (almost equal to 15 percent of tobacco revenues), with a major increase in these transfers slated for 2015, based on 2013 revenue realizations. In July 2016, which coincides with a new political administration, a Congressional Oversight Committee is mandated to review the impact of the tax rates provided under this Act.
The STL overcame a challenging political economy characterized by pronounced rent-seeking and elite capture. Dubbed as a “clever marriage of technical virtue and political pragmatism,” the STL navigated a political economy in which special interests had often proved hostile to major reforms seeking to serve the broader public interest. Framing the reform as a health measure rather than a tax measure helped its success. Together with a range of additional drivers as varied as sovereign debt ratings and international trade disputes, the cause of good health helped fuse a winning political coalition amid formidable opposing lobbies. The Philippines’ bicameral legislative structure meant the STL needed to be passed in the House of Representatives and the Senate, and then both versions reconciled by a bicameral committee. The reconciled law was finally passed in December 2012 by only one vote in the Senate, highlighting just how precarious reforms can be in the Philippines.
The STL helped the Philippines shed its historical label as the “sick man of Asia.” It helped the Philippines achieve an investment-grade sovereign debt rating. Overall tax mobilization, at 12.4 percent of GDP in 2011, was low by international standards. The tobacco and alcohol excise regime epitomized the exemptions, complexity, and lack of inflation indexing that stood in the way of improving revenues to finance the administration’s “Social Contract with the Filipino People” and bring down government debt. Lowering this to sustainable levels, supported by better sovereign debt ratings, would in turn also bring down the cost of financing debt. Decisive tax reform would signal to the markets that the Philippines could deliver on better tax and expenditure policies. The STL stands as one of the main legacy legislative policy reforms of President Benigno Aquino’s administration.
The STL and its implementation can be understood through both a “technical” lens and a political economy/institutional reform lens. This report contributes to our understanding of the STL by (1) providing an overview of the key health, revenue, and governance motivations of the reform and the corresponding features of the law; (2) analyzing how the political economy and institutional dynamics were married with technical analysis to bring about the law’s passage; and (3) setting out a monitoring framework by which the implementation and results of the tax and earmarking aspects of the STL can be tracked.
A cross-cutting question of this report is the extent to which the STL is both demonstrational and transformational. By demonstrational, we mean whether key aspects of its technical design, as well as the political reform process, can provide lessons for reforms in similarly challenging situations—whether related to tax or otherwise—in the Philippines and elsewhere. By transformational, we mean the extent to which the STL is part of a deeper institutional transformation in the Philippines, from policies and programs driven primarily by patronage and personalism to ones anchored in principles, evidence, and citizen entitlement.
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world bank
world bank