IN SEARCH OF A NEW TAX SYSTEM
The effectivity of RA 9334 ends in 2012. There are several proposals to replace this law on the sin products. Although a tax system is designed to increase revenue collection, a contradictory requirement in coming with a new tax system is to discourage smoking. One bill, House Bill 5727, seems to be the strongest contender among the proposals for change. While the other proposals continue to retain the classification or tiers of the brands, HB 5727 seeks to gradually eliminate the various classes and merge them into one by the Third Year of its implementation.
A study on the effects of the tax systems was undertaken, using sample brands that have available production and price data. These data are utilized to compute the base factors for expected production and revenue collections. The tax system of RA 9334 depends on classifying the brands into four tiers according to a set of values termed as “net retail price” or NRP.
The obvious advantage of the tax system laid out in RA 9334 is the ease in computing the collectible revenues. As mentioned above, the law expires in 2012 and thus needs another law to replace it.
On the other hand, as proposed by Rep. Abaya, HB 5727 (termed a unitary tax system) simplifies the process by imposing, in the Third Year, only one class or one tax value for all brands regardless of their qualities. The bill merely states that for the First Year, all Premium and High priced brands shall be taxed at P30.00 per pack, while all others at P14.00. For the Second Year, those brands taxed at P14.00 will be appraised at P22.00. By the Third Year, all brands are to be taxed P30.00.
Although the concept of HB 5727 eases the process of computing for the expected revenues, the tax system itself turns out to be too oppressive to the poor consumers (if they submit and accept the situation). While the tax system adds a mere 6 per cent addition to the Premium and High classes, the Low class (the 30 per pack brand) suffers an additional burden of 1554 per cent in taxes. Considering the reality of economic behavior, the “unitary tax” system will truly discourage consumption of legally manufactured cigarettes. However, as experienced by other countries, the heavy tax burden on the poor is conducive to encouraging the consumption of smuggled (cheaper) brands. Various countries have noted the effects of increasing taxes on their law and order situations.
In order to somehow “equalize” the tax burdens, the House subcommittee on Ways and Means proposes a reclassification of the brands by adjusting the NRP which would be the basis for computing for the expected revenues. The pattern of taxation is presented below.
A study of the various variations shows briefly some interesting results.
On RA 9334. The classification apparently was set “permanently” and was not adjusted even as the NRP must have changed due to inflation, among other factors. By recomputing the value of the NRP as proposed at the time the law was passed, and adjusting the rates to the available price and collection data, certain brands turned out to be classified differently. Some brands taxed as High-priced are supposed to be in the Premium class; and those classed as Low-priced are supposed to be parts of the Middle class. By readjusting the classification of the brands in accordance with the requirements of RA 9334, revenue collected would have increased by 200 percent. However, using the elasticity test only a few Low-priced brands survived; all others were eliminated.
On the other hand, the proposal of the House subcommittee adjusting the ranges of the NRP and applying the elasticity test increased expected revenue by 92 per cent but also increased production by 48 per cent.
As for HB 5727, in testing for expected production and revenue collections, the elasticity factor eliminated all of the brands included in the sample. Thus no revenue can be expected to be collected from them under this tax system.
One attempt to design a tax system to replace RA 9334 is to utilize an ad valorem method based on the NRP of the brands. This ad valorem experiment shows that the optimum ad valorem tax (AVT) is obtained using 50 percent of the NRP. The expected increase in revenue amounts to 48 per cent. On the other hand, consumption is decreased by 31 per cent.
The change to the ad valorem of NRP affects the values of the suggested retail price. In this tax system, the NRP is also expected to adjust to inflation, which will change, as well, the value of AVT. The drawback of the system is the various process of annually, if not quarterly, computing for the individual NRP of the brands so as to monitor revenue collections.
A study on the effects of the tax systems was undertaken, using sample brands that have available production and price data. These data are utilized to compute the base factors for expected production and revenue collections. The tax system of RA 9334 depends on classifying the brands into four tiers according to a set of values termed as “net retail price” or NRP.
The obvious advantage of the tax system laid out in RA 9334 is the ease in computing the collectible revenues. As mentioned above, the law expires in 2012 and thus needs another law to replace it.
On the other hand, as proposed by Rep. Abaya, HB 5727 (termed a unitary tax system) simplifies the process by imposing, in the Third Year, only one class or one tax value for all brands regardless of their qualities. The bill merely states that for the First Year, all Premium and High priced brands shall be taxed at P30.00 per pack, while all others at P14.00. For the Second Year, those brands taxed at P14.00 will be appraised at P22.00. By the Third Year, all brands are to be taxed P30.00.
Although the concept of HB 5727 eases the process of computing for the expected revenues, the tax system itself turns out to be too oppressive to the poor consumers (if they submit and accept the situation). While the tax system adds a mere 6 per cent addition to the Premium and High classes, the Low class (the 30 per pack brand) suffers an additional burden of 1554 per cent in taxes. Considering the reality of economic behavior, the “unitary tax” system will truly discourage consumption of legally manufactured cigarettes. However, as experienced by other countries, the heavy tax burden on the poor is conducive to encouraging the consumption of smuggled (cheaper) brands. Various countries have noted the effects of increasing taxes on their law and order situations.
In order to somehow “equalize” the tax burdens, the House subcommittee on Ways and Means proposes a reclassification of the brands by adjusting the NRP which would be the basis for computing for the expected revenues. The pattern of taxation is presented below.
A study of the various variations shows briefly some interesting results.
On RA 9334. The classification apparently was set “permanently” and was not adjusted even as the NRP must have changed due to inflation, among other factors. By recomputing the value of the NRP as proposed at the time the law was passed, and adjusting the rates to the available price and collection data, certain brands turned out to be classified differently. Some brands taxed as High-priced are supposed to be in the Premium class; and those classed as Low-priced are supposed to be parts of the Middle class. By readjusting the classification of the brands in accordance with the requirements of RA 9334, revenue collected would have increased by 200 percent. However, using the elasticity test only a few Low-priced brands survived; all others were eliminated.
On the other hand, the proposal of the House subcommittee adjusting the ranges of the NRP and applying the elasticity test increased expected revenue by 92 per cent but also increased production by 48 per cent.
As for HB 5727, in testing for expected production and revenue collections, the elasticity factor eliminated all of the brands included in the sample. Thus no revenue can be expected to be collected from them under this tax system.
One attempt to design a tax system to replace RA 9334 is to utilize an ad valorem method based on the NRP of the brands. This ad valorem experiment shows that the optimum ad valorem tax (AVT) is obtained using 50 percent of the NRP. The expected increase in revenue amounts to 48 per cent. On the other hand, consumption is decreased by 31 per cent.
The change to the ad valorem of NRP affects the values of the suggested retail price. In this tax system, the NRP is also expected to adjust to inflation, which will change, as well, the value of AVT. The drawback of the system is the various process of annually, if not quarterly, computing for the individual NRP of the brands so as to monitor revenue collections.
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2:12 AM
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