Tobacco Industry Still Sees Demand Despite Rising Taxes

Source from:  BusinessWorld Online 12/26/2018

THE tobacco industry expects continued growth on sustained domestic and global demand despite plans to raise the excise tax on tobacco products to discourage consumption and fund the health sector.

“While high excise tax rates had a big impact on production figures and livelihood of our tobacco growers, this will not ‘kill’ the industry. As long as there is market demand for quality tobacco, our farmers will still continue to produce tobacco,” Robert L. Seares, Administrator of the National Tobacco Administration (NTA), told BusinessWorld in an e-mail interview on Tuesday.

“In terms of profitability, tobacco production is not yet a sunset industry. While there is still demand for quality tobacco in the global market, the agency is now focused on higher volume of exports due to the quality of tobacco leaves, particularly Burley, that local farmers can produce,” Mr. Seares said.

Increased tobacco taxes are pending approval, under the Comprehensive Tax Reform Package 2 and Senate Bills 1599 and 1605, which intend to fund the public health sector.

The House Ways and Means Committee approved in principle the measure increasing excise taxes on tobacco products by P2.50 annually until it reaches P45 in 2022, and by 4% every year thereafter.

Mr. Seares, despite saying that tobacco is not yet a sunset industry, said higher excise taxes will adversely affect farmers.

“Tobacco leaf production in the Philippines has been reduced to only 48 million kilos in 2017 from 65 million kilos five years earlier. Our five-year data (2013-2017) shows that the number of tobacco farmers and area planted to tobacco plunged by 40% to 34,465, and 43% to 22,704 hectares, respectively,” Mr. Seares said.

“Take note that excise tax rate has been going up since the passage of the Sin Tax Reform Law in 2012, diminishing tobacco production figures. With another more to increase tobacco sin tax, our tobacco growers are now faced with a more serious threat of losing their primary source of income,” he added.

Demand for cigarettes has declined since the increase in tobacco taxes, according to a study by Professor Myrna S. Austria and lecturer Jesson A. Pagaduan of De La Salle University (DLSU).

The study, “Assessing the Impact of the Philippine Sin Tax Reform Law on the Demand for Cigarettes” found that “the decline in cigarette consumption by smokers contributed more to the total effect of a cigarette price increase on demand than the decline in the number of smokers.”

The study said demand for tobacco has decreased due to the increasing sin tax as well as the existence of alternatives such as electronic cigarettes.

It also found that the current tobacco tax system is easier to administer and effective for the reduction of tax evasion as it imposes a uniform tax rate, and manufacturers cannot misclassify brands or under-declare their products to reduce taxes.

The tax system used to be four-tier in 1997-2012, then became two-tier in 2013, and unitary in 2017, and now will have a 4% annual increase effective 2018.

“To guarantee that cigarettes will continue to be less affordable, the policy goal is to ensure that the relative increase in price due to an increase in excise tax should be higher than the increase in per capita income,” the authors said in their conclusion.

“At the very least, the increase in excise tax should be either 4% as mandated by the law or indexed to the current inflation rate, whichever is higher,” it added.

NTA’s Mr. Seares said that raising tobacco excise tax is one of the most effective and cost-effective measures to reduce consumption, and that it favors the health sector as 80% of the incremental revenue will go to fund universal health care.

“Increasing tobacco excise taxes is a government measure to curb cigarette smoking for health reasons. The purpose really is to lower sales of the product, by decreasing cigarette consumption by increasing the price, and lowering demand for it,” Mr. Seares said.

“[W]e will continue to regulate the tobacco industry to promote a healthful environment for the benefit of the population, but we also have to ensure that the interests and welfare of the tobacco farmers are not adversely compromised,” Mr. Seares added.

Ariel T. Cayanan, Undersecretary of the Department of Agriculture, said that for as long as tobacco remains legal in the country, farmers cannot be stopped from planting it.

“I think the name of the game, not just in agriculture, is your capability to earn. The moment you lose, you can only survive for some time. The tobacco industry has been around for a long time,” Mr. Cayanan said in an interview on Wednesday.

“[Tobacco companies] say they are incurring losses, but who wants to continue operating with losses?” Mr. Cayanan said.  Enditem