Congress ratifies bill imposing

additional 'sin taxes'

By CNN Philippines Staff

Published Dec 18, 2019 6:10:36 PM

Congress ratified Wednesday night the bill setting additional excise taxes on alcoholic beverages and e-
cigarettes, as it goes on recess for the Christmas season.

The bill will be submitted to the President for signing into law.

The bicameral conference committee approved on Wednesday afternoon the so-called "sin tax " bill.

The reconciled version of House Bill 1026 and Senate Bill 1074 , if enacted, will raise P24.9 billion in
additional revenues for the universal health care program.

According to Senate Ways and Means Committee chairperson Pia Cayetano, the new tax rates are the
following:

- fermented liquor (specific tax rate): P35 in 2020, P37 in 2021, P39 in 2022, P41 in 2023, and P43 in
2024, with a 6 percent indexation thereafter.

- distilled spirits (specific tax rate with 22 percent ad valorem tax): P42 in 2020, P47 in 2021, P52 in
2022, P59 in 2023, and P66 in 2024, with a 6 percent indexation thereafter.

- sparkling and still wines (specific tax rate): P50 in 2020, with a 6 percent indexation thereafter.

- heated tobacco products (specific tax rate): P25 in 2020, P27.50 in 2021, P30 in 2022, and P32.50 in
2023, with a 5 percent indexation thereafter

- salt nicotine (specific tax rate): P37 in 2020, P42 in 2021, P47 in 2022, P52 in 2023, with a 5 percent
indexation thereafter

- free base (specific tax rate): P45 in 2020, P50 in 2021, P55 in 2022, P60 in 2023, with a 5 percent
indexation thereafter

Apart from raising taxes of alcohol and tobacco products, the proposed measure also aims to impose
higher tariff for vapor products including electronic cigarettes.

It also imposes stricter regulations for the sale of e-cigarette.

House Ways and Means Committee chairperson Joey Salceda and Cayetano said the measure prohibits
non-smokers and those below 21 years old from buying e-cigarettes.
Violators will face penalties, including jail time.

The Senate approved its version of the bill on Monday, while its counterpart measure passed the lower
chamber in August. President Rodrigo Duterte certified the measure as urgent in November.

Lawmakers have previously expressed a possible “win-win situation” with the bill’s passage— as it seeks
to curb vices while supporting the nationwide health program.
 Philippines congress officially consented to an excise tax on alcohol and e-cigarettes as it
seeks to maintain order as well as curb the negative externalities and reduce welfare loss created by
over-consumption of the goods. An excise tax is an indirect tax imposed on the sales of a specific
good or service to be paid by the supplier or producer.
 Negative externalities in Philippines refers to the external costs created by the consumption
of alcoholic beverages and e-cigarettes. As consumers use e-cigarettes they pollute the air,
quickening the process of global warming. Furthermore, cases of illnesses from side-effects of e-
cigarettes have been reported around the world, so if a consumer of e-cigarettes fall sick it becomes
the government’s responsibility to provide health care for such person. Generally the consumption
of such goods have wider impacts that affect a large percentage of an economy, making it a
demerit good. In essence the government is left better off.
Assuming that before the excise tax impose, the market for alcohol and e-cigarettes in
Philippine operated at equilibrium point Qm at Pm where MPB (S) intersects MPC (D). An
overallocation of resources is represented because the total output Qm is greater than the socially
optimum level of output Qo. In order to correct the misallocation of resources, a tax is imposed
shifting the supply curve upwards by the amount of the tax from ‘S = MPC’ to ‘MPC+Tax’, for
each unit of output producers are now paying an extra cost which will be included in the price of
the goods. A new equilibrium is given by the intersection of MSC and the demand curve D which
represents Marginal social and private benefit followed by a higher price level Popt, however, there
is a lower quantity demanded at Qopt. It must be noted that consumers in Philippine pay the price
Popt, however, producers only receive Pp after removing the tax per unit paid to the Philippine
government. Theoretically the aim of curbing the consumption of the demerit goods is achieved
since there is a retraction of the quantity demanded Qm to Qopt. Therefore external costs are cut
down thus reducing the market failure.
The Philippine government gains revenue from The tax without having incurred any cost to
impose the tax. The goods may be addictive making them price inelastic so consumers do not
really change consumption, resulting in high revenue for the government that can be invested into
provision of merit goods which could solve the problems already created by the demerit goods. For
example, the revenue could be invested in healthcare systems and rehabilitation centers for those
who are addicted.
The government may have achieved regulating the basic demand and supply of alcoholic
beverages and e-cigarettes in the market, however it has not accounted for the fact that these goods
are addictive which makes them price inelastic. It can be assumed that a price increase will only
lead to a smaller than proportionate fall in the quantity demanded, leaving the higher percentage of
consumers still with the same consumption habits. Consumers are left worse-off because they have
to pay higher-prices. The Philippine government also imposed penalties for defaulters, leading to
the assumption that underground markets may be opened to illegally sell the taxed goods at
cheaper prices. In that sense the objective of the tax is unattained because, prices are brought down
illegally and quantity demanded for the goods rises once again. Exact values of the tax placed on
each good is provided for example, P35 for fermented liquor in 2020. However it must be taken
into consideration that the lawmakers in Philippine do not know exact values for the amount of
external cost created by the consumption of the goods. The imposed tax may be lower than the
actual costs created, therefore, the externality is not necessarily internalized because, consumers do
not pay for their full costs.
The overconsumption of alcoholic beverages and e-cigarettes led to impose of an excise tax
which is indirectly included in the price paid by consumers. The tax impose should act as a
reallocation of resources so it can be supplied and demanded at a socially optimum level.
Additional revenue for the Philippine government is raised and can be invested into provision of
merit goods, however, there is a risk of illegal transactions in underground markets. It can be
argued that producers are left better off and consumers worse off.