Excise taxes are my favorites. They are imposed on goods that cause harm like cigarettes, alcohol, motor vehicles, and fuel products. In certain societies, there is an excise tax on gambling and pollutants like plastics.
The excise tax on cigarettes ended my career in government. The cigarette manufacturers saw to it that I would be punished after the government shifted from ad valorem to specific taxation. The tax is now levied per pack of cigarettes rather than on the price. Ideally, specific taxation is easier to administer, and the tax can be collected more efficiently.
But excise taxes are the least favorite among manufacturers. The tax increases the price of cigarettes and reduces demand. Naturally, a shrinking market means fewer sales, lower revenues, and smaller profits. For many years, manufacturers have devised ways to be ahead of the game. During my time, prices of cigarettes were under-declared. An ingenious way was to create marketing arms that bought cigarettes from manufacturers at low prices. This was a sham of course, because the manufacturers own the marketing arms. It was a case of a manufacturer selling the cigarette to itself. The practice went on for years in the face of tolerant and inefficient tax enforcers.
Another way was to misclassify cigarettes as “low-priced.” Congress disapproved of a unitary rate, and for so long, “low-priced and low-taxed” cigarettes dominated the market.
Finally, after so many years, the government used its power to curb smoking by legislating a unitary rate, a higher high tax rate, and a regular increase in the tax burden. It helped significantly that the government was a signatory to the Framework Convention on Tobacco Control (FCTC), a worldwide agreement to protect society from the harm caused by smoking.
We would think that this would be the end of the game. But manufacturers have found several steps to be ahead. They created new products and a new market. These are tobacco alternatives that are introduced as “harm reduction products.” The increased price of cigarettes made people look for cheaper alternatives because smoking is a habit that is hard to kick. Although 95% of smokers (15.9 million) believe that smoking carries with it several health risks, only 4.5% of those who tried to stop smoking were successful (Global Adult Tobacco Survey). Another study found that the decline in tobacco consumption was due to a decline in smoking intensity, i.e., a decrease in the number of cigarettes consumed by smokers, not because of a decline in the number of smokers (Austria and Paduan).
The Department of Health has a tobacco cessation program. A hotline, 1558, is efficiently staffed with courteous Psychology graduates. They serve as coaches in helping smokers implement a quit smoking program. But like many government programs, it has a limited reach. Its power to attract a big audience pales in comparison with vapers, manufacturers, and users of tobacco alternatives. Quickline, the Facebook page of the DOH has 2,100 followers compared to a small vaping shop in Makati with 9,400 followers. Vapers and consumers of E-cigarettes form Facebook and chat groups that regularly communicate. Group members send personal messages like “Are u up?” Vape products are easily accessible through their low prices, varied flavors, vape shops, online selling, and barter, aka-swapping.
The market for alternative tobacco products is growing fast. Statistics estimated the number of vapers in the country at 250,000, and the number grows by 20% to 25% every year. The youth have found the products attractive. Survey data estimated that 1 in 7 students aged 13 to 15 are vapers and that 2 in 5 students found vaping products readily available in the market. Currently, access is limited to those who are 21 and above.
It does not help any that the revenues from the cigarette tax, a whopping P148.3 billion in 2019, are under-utilized and, in many cases, inefficiently spent. The DOH had a low utilization rate of 60%-to 65% and returned 35% of what could have been spent for better health care to the Treasury. The revenues intended to finance universal care through PhilHealth is surrounded by complaints and allegation of corruption.
New markets and government inefficiencies—these are ways to beat the excise tax!
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