THE CROWN AFFAIR OF 2012

On May 22 embattled Corona took the witness stand to present his case. Instead of submitting himself to direct and cross examination under oath, he spent about three hours narrating his biography in the vernacular as the oppressed by the relatives of his wife, as well as the victim of a vindictive president using all the powers of government to abuse, insult and humiliate him. He presented himself to the people, using the Impeachment Court for his rostrum, as an object of pity. I suspect that he spoke in the vernacular in order to obviate any analysis and commentary from the international audience which is definitely monitoring the historic impeachment drama in the Philippines.

He could have limited his presentation to the enumeration of the oppression and indignities inflicted on him. But in order to further identify himself with the rest of the people, he spoke about his personal life style. He should not have continued.

As Ms Patricia Evangelista of the Philippine Daily Inquirer observed in her column of May 27, “it is in the small matters that he makes mistakes, in questions not of legality but of simple honesty. He lives, he said, a simple life. ‘Our lives and home are simple. We don’t even use the air conditioner because we become easily ill in the cold. The food we eat in our home is simple. Believe it or not, we do not have maids at home.’ In 43 years, he said, he ‘has never purchased large properties or expensive properties.’

I have earlier written my observation about his statement “walang katulong” (no maid). I asked Tess, our own katulong who had served the Coronas before, what the situation was when she was there although as a server for Ms Corona’s canteen. She said that there were three maids for the household – a cook, a laundress, and a cleaner.

Assuming that the present is different from the past situation, and the Coronas do really have no maid, having a simple life style could be a different matter. As a Chief Justice of the Supreme Court of the Philippines, he would not live like any ordinary citizen in cramped quarters in a cramped neighborhood. I may not have seen his present residence but from what my maid, Tess, told me he has an expansive garden with two houses and surrounded by high walls. If they truly do not have a maid, who cooks, who launders, who cleans the living quarters and who tends the garden? His children are already married and are practicing professionals; they would not be available to service the home even during weekends. Does Mrs Corona use washing/drying machine to launder? This is not a sign of simple living. Does Mrs Corona use vacuum cleaner to tidy the living quarters? This is not simple living. If Mrs Corona only cooks for breakfast (which is simple to do), do they have caterers, or do they eat outside for their other heavy meals?

Again, Ms Evangelista wrote that “his defense team has admitted to Corona’s ownership of five high-end properties—in Bellagio, Bonifacio Ridge, The Columns, Xavierville and Burgundy Condominiums—an admission that Corona himself supported last Tuesday. Perhaps the Chief Justice has a different definition of what counts as expensive, and it is a definition that he does not share with the rest of the Philippine population. Yet even if the properties are ignored, this same simple man with a simple life also spends more than P15,362.37 for a meal with his wife at Century Tsukiji restaurant, up to P24,000 each for a pair of barong Tagalog purchased at Rustan’s, and a hundred thousand for the purchase of Christmas gifts. A Rappler.com investigative report details these purchases, as well as the fact that all of these and many others were reimbursed by the Supreme Court. It is difficult to construe a shirt that costs more than a semester’s college tuition as simple, but perhaps the Chief Justice was merely attempting to uphold the image of the Supreme Court in his choice of atelier.”

My nagging question is: why did Corona have to make that irrelevant statement about being a simple man with simple needs when it is not expected for his defense in the impeachment trial? To lie under oath is more damaging than presenting “honest oversights and failures” for failing to include certain items in his Statement of Assets, Liabilities and Net Worth. Such indicator, “trivial” perhaps, may be considered a Freudian slip-of-the-tongue.

And yet, I cannot accept the excuse that it was a slip-of-the-tongue because Corona read from a (perhaps) week-long prepared script for delivery on that Tuesday trial. He must have been used to telling “small lies” that like the scorpion that stung a helpful frog to death because it is its nature to sting, that lying is in his nature to lie.

I wonder how our senator-judges can see the fitness of Corona to stay as chief justice of the Supreme Court, when he seems to bend the law to suit his purposes. For instance, he interprets (as supreme court justice?) the bank secrecy law as excluding his dollar assets from being declared. “It is an odd reason,” according to Ms Evangelista, “and one that subverts the purpose of the statement of assets, liabilities and net worth, whose purpose is to compare a public official’s property against what he can legitimately acquire within his declared income.”

If I am asked, I cannot consider Corona as fit to be Chief Justice of the Supreme Court.

FAIRNESS, ETCETERA

In my earlier article, I wrote that “I am concerned about fairness” in the imposition of the “unitary” taxes on cigarettes as proposed in House Bill 5727.

Historically, the taxing authorities have recognized that there are four gradations of cigarette qualities, and past tax schemes were designed to adapt the rates to the spending capacity of consumers. The previous system of classifying cigarettes into four, namely, Low, Medium, High, and Premium, did not serve to discourage smoking. Even as the rate of production (being equated to consumption) declined, expectedly the amount of taxes collected continued to increase. The experiences must have encouraged the tax designers to come up with more repressive rates in order to reduce consumption while at the same time expecting to truly raise revenues to record highs. And to further simplify tax assessments and collection the proposed bill of Rep. Abaya actually places all types of cigarettes under one class by the Third Year of its implementation.

Under HB 5727, the repressive rates that are expected to raise P30 billion in revenues become more burdensome to the consumers of the low quality cigarettes as the increase in taxes amounts to more than a thousand percent, while those being imposed on the high quality cigarettes amount to a mere hundred and fifty percent.

This is where my concern is focused – the disparity in treatment.

I happen to be familiar with a principle in taxation that says equity must be observed in imposing taxes. The taxes being imposed must equally burden all those who are being taxed under similar economic situations. In the case of cigarettes, the poor consumer is being oppressively burdened.

Therefore, in principle it should stand to reason that taxes imposed on the different classes of cigarettes must be in proportion to their qualities. I am sure that this imposition is observed in the process of manufacture, particularly in the matter of computing the Value Added Taxes on the different components and stages of producing the cigarettes. (I have assumed that VAT and profits are not part of the net retail price.)

The reasoning of HB 5727 is that all the types of cigarettes are being taxed equally by the Third Year at P30 per pack. There is apparent equality in the amount proposed. On the other hand, as far as I am concerned, taxes must be based on the value or quality of a good. If an item being taxed is cheap, the tax must be low. If the item taxed is luxurious, the tax must be high. A wedding ring with a quartz stone is taxed much lower than a diamond wedding ring. A jeep is taxed lower than a BMW or a Porsche. The principle is as simple as that.

At this point I shall veer off momentarily from the matter of appropriate tax valuations and take on a stated objective in the Manifesto – that is, to discourage smoking.

I am of the opinion that as a sin product, we ought not to consider cigarettes, or tobacco for that matter, as a “good” that deserves to be taxed according to their qualities and values. The tax bill must be honest enough to assert that the P30 being imposed on all types of cigarettes is not a tax but a penalty.

All smokers, regardless of the quality of their cigarettes, must be penalized for smoking because not only do they harm their health (which they do not think should matter at all to others) but they pollute the environment and hasten climate change. In so doing, we also send the message that any investment engaging in the manufacture and importation of cigarettes is not welcome.

Perhaps, we should label the imposition in HB 5727 as an environment and health tax. Thus, we can truly equalize the amount imposed on all to, say, P40 to make it worth P2 per stick. Or even more. Everybody who smokes, whether President or street sweeper, must pay the penalty. Since we cannot have the police look for, arrest and charge smokers for polluting the environment and endangering the health of the community, the penalty tax is already embedded in the price paid for the cigarettes they consume.

I admit that the penalty tax rate I indicated, that is, P40 per pack applied equally to all types of cigarettes will practically eradicate the industry and erase as well prospects of collecting revenues. There is still the matter of raising funds for purposes of adjusting certain elements of the industry during the transition to its “total elimination”. I still appreciate the idea of killing the industry softly and profit from its slow demise. Keeping it alive may yet impede the growth of smuggling and clandestine manufacture of the sin product which our authorities have extreme difficulty in detecting and curbing.

Thus, I could accept the proposed tax bill but with a recommendation to lower the tax rate of the Low priced brands to P8 instead of the P14 for the First Year. This way, the brands will continue to be produced and survive until the Third Year. Nonetheless, even with the adjustment I made in my computed simulation I still maintain that revenue collections will not reach the P30 billion estimated by the proponents of the bill.

As well, the decrease in production and legal consumption will still encourage clandestine operations of supplying the commodity to those who cannot drop the habit of smoking.





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A QUESTION OF FAIRNESS

From the blog of Ms Ellen Tordesillas, I came upon her strongly urging support for a manifesto on House Bill 5727 posted in Facebook. According to her blog, she wrote: “The manifesto explains the financial advantage to the government and to the Filipino of higher taxes for alcohol and cigarettes. It says, ‘On the first year of implementation, the government is expected to raise additional revenues worth P60 billion, of which, P30 billion is from cigarettes, P11 from distilled spirits and P19 billion is from beer.’”

I checked the manifesto posted in Facebook, and indeed there is the claim of P30 billion that can be generated by HB 5727. If you consider the past collections from cigarettes, this claim is not gargantuan. The records I managed to get, which were in 2010, said that the total collections amounted to more than P31 billion. On the other hand, I tend to wonder how, with the unitary tax system proposed, and supported even by experts in the Finance Department, would have resulted in the claimed amount. On the surface, P30 billion (compared with the P31 billion collected in 2010) may not be impossible to achieve. However, if economic “laws” are to be followed, there is such a thing as “elasticity” that comes into play.

In another article, I read that the economic analysts consider the elasticity factor to be 0.8, debunking the other values as inapplicable to our situation. (By the way, elasticity is always negative in value. Thus computations will have to consider that elasticity tends to reduce expected values.) I tried using the “accepted” value of -0.8, and my results are all negative. In other words, we cannot expect any production of cigarettes. Naturally, my computations are unbelievable and impossible. There will always be some cigarettes to be produced; demand for legally and taxable cigarettes may be reduced, but we have to cope with the influx of smuggled brands that will satisfy those who cannot avoid smoking. It is unfortunate we have no statistics on smuggling, particularly cigarettes, so that we cannot truly estimate with conviction how much any situation will tend to encourage or discourage the illegal activities.

(The Prohibition in the United States during the early part of the last century totally outlawed liquor, but bootlegging and smuggling flourished. In Wikipedia, it says “The lack of a solid popular consensus for the ban resulted in the growth of vast criminal organizations, including the modern American Mafia, and various other criminal cliques. Widespread disrespect of the law also generated rampant corruption among politicians and within police forces.”

(In the same manner, we cannot expect to outlaw smoking. We cannot expect “solid popular consensus” for the ban even if we issue manifestos left and right. All the health threats have been thrown into the matter and we still have cigarette smoking proliferating in the streets. The police find it absurd and useless to arrest and imprison the sellers of sticks – not packs – of cigarettes that roam the streets. Possibly, the itinerant vendors may be picked up for jaywalking but not for selling sticks of Marlboros to jeepney drivers.)

In order to come up with some figures on expected cigarette production, I adopted the elasticity value of -0.5 mentioned by the American Lung Association, and came up with the following results for the First Year of applicability:
(I still included the results obtained using the elasticity value of -0.8). Under this condition, all Low and Medium-priced brands produced negative values; they are taken out of the market. Only the High-priced brands survive. After all, the difference between the present tax rate and the proposed amounts can be afforded by the rich. On the other hand, the increase in tax rates is an oppressive burden to the “poor”. Taxation under HB 5727 is inequitable; the poor are levied heavier tax rates than the rich. (If you compute the tax per stick imposed by the third year, the Low-priced brands absorb 1000 per cent, compared to the High-priced brands that are assessed ten times less.)

Where is the P30 billion to come from under this unitary tax of Rep Abaya?

Truly, there is a need to come up with a system that will erode the practice of smoking while at the same time give the government something to collect in order to cope with the deleterious effects of smoking. After all, we cannot eradicate the use of tobacco. If we cannot eliminate a vice, we might as well profit from it, just like lotto.

I understand that there is an alternative system proposed by a House subcommittee that improves on RA 9334, but is not as oppressive as HB 5727. On the other hand, HB 5727 is being pushed by a foreign cigarette maker, finding it conducive to its purposes without truly entailing high costs in production but expanding its market in the Philippines. If the bill intends to encourage foreign investment in the tobacco industry, it is contrary to the effort of government to discourage smoking altogether. I could even dare say (without proof) that that foreign investment is a Trojan horse that would be a vehicle for smuggling “high quality” brands at cheaper prices.

I am a non-smoker and ought not to bother and protect the interests of tobacco farmers and manufacturers and users. I know they can take care of themselves. However, I am concerned about fairness in the imposition of taxes. Make heavy the sin taxes, but equalize the tax loads of our “sinful” citizens. For instance, if the net price of a Low brand is P10; then tax it double or P20. If a net price of a High brand is P30, tax it P60. The tax burdens of both the poor and the rich are 200 per cent.

I am aware of other unfair tax laws, but cannot comment on them because of lack of data to support my contentions.

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.

THOUGHTS ABOUT CIGARETTE MAKING

Before I go on to write about the present status of the tobacco industry, particularly about cigarettes, I take the liberty of citing my experiences during World War II Japanese Occupation. I was about twelve years old then.

In our daily struggle to survive – my father who used to work in an American company, Koppel Philippines, and thereby unemployed – we had to engage in a variety of businesses. One day, my mother brought home a contraption for rolling cigarettes. Having relatives in Biñan, Laguna, she learned about the thriving industry at that time in manufacturing cigarettes that competed with the Japanese brands, like Pirate and Akebono. Furthermore, there were already difficulties in importing cigarettes—the priorities of the Japanese were for munitions and logistics—which encouraged the making of local ones. The contraption was basically a roller, with a canvass or thick oil cloth (the same as those used as table cloth in restaurants) which rolled the paper over a small pile of tobacco.

For a time, we had to experiment on how much tobacco we had to put to roll a passable stick. If too few, the cigarette would burn too fast. If too plenty, the stick becomes too tight and the smoker would have problems puffing at it. Then after the roll is done, we would have to trim off the tobacco strands that stick beyond the edges of the cigarette stick.

I also had some creative moments designing the packages. I copied the packages of the ones in the market, which were like oversized match boxes that had the cigarette sticks slide out instead of being tapped to let only a stick or two come out. I prided myself in illustrating the cover and lettering the brand (I can’t remember what names we came up with at the time). There was a time when I copied the designs of Chesterfield and of Camel cigarettes to decorate the packs.

That was the situation during the Japanese Occupation when cigarettes were made and rolled manually.

After so many decades, I had the opportunity to watch how cigarettes were manufactured by huge machines. No longer a few seconds to make a stick but now hundreds of sticks per second are spewed by gigantic rollers and packed and made to pass through stages where they are sorted, qualified, quantified and packed. The sticks and/or packs that do not pass quality standards are disposed, either to be recycled or thrown away.

I had the opportunity also to see the reports that detail how many packs are “removed” or produced, and how much taxes are imposed on every pack. And I learned that cigarettes are graded according to their qualities based on the tobacco mix they contain, that is from Low to Medium, to High and to Premium. The first three qualities are produced in million packs, while the Premium brands are practically ignored in the revenue collection reports most probably because these are the imported ones.

I do not remember how the cigarettes made during the Japanese Occupation were taxed. Possibly, the local packs remained untaxed, although the Japanese must have some system of collecting taxes for the commodities produced during those times.

On the other hand, the taxes (net of retail price) collected lately by the Bureau of Internal Revenue are based on the quality of the brands. The Low-priced brands are taxed at P2.72 per pack; the Medium-priced at P7.56; the High-priced at P12.00, and the Premium class at P28.30 per pack. Excepting some Low-priced brands, all are packed in twenties. Some Low-priced brands are packed in thirties; these are not available for sale in the cities but seem to be consumed in the rural areas because of their low prices.

By the way, I am a non-smoker. Thus I cannot say how to distinguish the quality of the cigarettes based on the tobacco blend they contain. I can only recall the experience I had as a plebe in the Philippine Military Academy when I thought the brand Matamis, which my mother sent me, is no different from Chesterfield or Lucky Strike and gave a stick to an upperclassman who asked for one. He made me eat it.

Going back to the present, I also learned that most of the consumers, except among the elite and the rich, buy their smokes by the stick. That is the reason why there are vendors along the Metro Manila thoroughfares that weave among the traffic selling cigarettes to the jeepney drivers and even lighting the sticks for them. I think the main reason for buying by the stick is to discourage panhandling from other smokers. As well, it is cheaper to buy by the stick than to have them by the pack. One can smoke the High-priced brand, like Marlboro, for P3.00 (the retail price along the Service Road in Bicutan) instead of paying P44.00 for one pack selling at any 7-11 store.

Now, in 2012, I learned that Congress is passing a law raising the taxes on cigarettes as part of the drive to discourage smoking but not necessarily making smoking a crime. The proposed law, the Abaya bill, removes the distinctions between brands – no longer Low, or Medium or High or Premium – but all under one class and taxed at P30.00 per pack of twenties. Obviously, this tax rate will raise the prices of the sticks. The new rate is a not-too-subtle way of penalizing smokers. In the example I cited above, Marlboro will no longer cost P3.00 but will perhaps reach P5.00 per stick to make it worthwhile to walk the streets to sell.

I do not think the jeepney drivers will demonstrate against this rate increase like they do against the rising prices of gasoline where they demand the abolition of the value-added tax. The government raises taxes in order to support its various operations (as well as the perks and "intelligence" funds of its high officials). In fact, the official reason for taxing cigarettes – which is a “sin” product -- is for the purpose of raising P60 billion, they say, to ostensibly serve the health program of the government.

If the Abaya bill is passed into law, I am quite sure that the production and revenue collection of cigarettes will suffer serious decreases, particularly among the Low-priced brands. In turn, the P60 billion target of the new law will never be reached.

However, there will be no serious decline in smoking. I suspect that there will be “cottage industries” in the rural areas that will produce “local” smuggled brands that will satisfy the cravings of the smokers. It is easy to make the hand-operated contraptions to roll the cigarettes. These will not require huge buildings but can be operated even in the small rooms in any hut in the provinces (or even in the cities).

I also suspect that the blended discards in the cigarette factories will find ways to reach these “cottage industries” and be converted to cheap high quality tax-free cigarettes. If I were a cigarette addict, I will try and contact somebody in a cigarette factory, say, La Suerte or Mighty, and buy me a small sack of tobacco blend which I can roll on my own at home.

While the government will be watching the entry of smuggled brands from outside the country, some local politicians will be tolerating, if not abetting, the local-smuggled ones to proliferate. The situation will be jueteng type of operations in the clandestine production of cigarettes, perhaps mostly in the hinterlands of the tobacco producing regions.

MIXED SIGNALS?

The government is dead set to discourage cigarette smoking and liquor drinking for health reasons. But the more intensive effort is against smoking.

It started by prohibiting advertising the merits of cigarettes. Billboards no long proclaim the “virtue” of smoking. Packs of cigarettes warn smokers of the dangers of smoking, if not by printing the physical horrors of getting various diseases such as mouth cancers, etc.

And then enclosed spaces began to have signs and notices prohibiting smoking in the premises. Eventually entire buildings became hostile areas for smokers. It is now declared that smoking is a “sin” although not in its theological sense.
Smoking is not as yet considered a crime, unless the smoke comes from a prohibited leaf, the marijuana. (Marijuana, however, has some medicinal value.)

Even as these activities are being pronounced by the government, the manufacture of cigarettes continues to be tolerated. The reality is that smoking tobacco can never be totally eradicated. There will always be smokers. In the same manner the “sin” of drinking booze can never be eradicated. The historical example of Prohibition in the United States showed the futility of criminalizing drinking. (In the Muslim countries, drinking liquor is punishable by public lashing during Fridays.)

If governments cannot eradicate a vice, they impose taxes to somehow make the vice pay for being tolerated. The heavy taxation is the “productive” venture in terms of extracting money from the vice. Instead of criminalizing smoking, where every violator is arrested and incarcerated, the violator is made to pay beforehand his penalty in the form of taxes imposed on the cigarette he smokes. (However, we cannot equate “tax” with “penalty” because there are other taxed items that are not prohibited but necessary.)

In the Philippines the tax laws on cigarettes somehow recognized that our social classes have differing capacities to be able to afford the sin commodity. For the poor, cigarettes that are classed Low are taxed at P2.72 per pack, including those packed in thirties. The Medium-priced brands are taxed at P7.56 per pack. The High-priced brands are taxed at P12.00 per pack and the Premium class at P28.30 per pack. Most of the classes are packed in twenties, although lately, perhaps to make it affordable to consumers, the cigarettes are packed in tens. The tax system mentioned ends this year, 2012. Thus there are bills in the House of Representatives proposing new tax rates, one of which is HB 5727. The new proposed law also prohibits machine packed cigarettes to be more than twenty.

However, there is the significant provision to remove the classifications among cigarettes. The entire gamut of cigarette types will be merged into one class and taxed under one rate – at P30 per pack. This concept is being pushed by the Department of Finance for ease in revenue collection as well as to increase in collection expected to reach P60 billion for both cigarettes and liquor. The Department of Health does not object to the concept even as it is for total eradication of smoking because the revenues to be collected as sin taxes are to be shared to deal with the health problems. As well, although the new tax system will truly reduce the production of cigarettes, it is not a fool-proof solution to reduce smoking. Consumption will still continue. Consumers who cannot afford the prohibitive prices will look for other means to satisfy their cravings.

Although all local cigarette manufacturers object to the new proposal, the British American Tobacco is pushing for the House bill’s approval. This company left in 2009 but hopes to reenter the field if HB 5727 is passed. It claims that the unitary tax proposal will “level the battlefield” in the Philippines which is presently being almost monopolized by the merged Philip Morris and Fortune Tobacco companies. The other small cigarette companies, namely La Suerte, the Associated Anglo American, and Mighty are engaged in the production of the lower types of brands in the market. They will be the most disadvantaged producers under the system.

If the House bill on the unitary tax is approved BAT promises to invest in the country, set up plants in some provinces and give employment. It pooh-poohs the possibility of Bocalizing the country where smuggling of cigarettes will again be one of the serious peace and order problems to be faced by the government. The contention of BAT is -- why will smugglers bring in their goods in the country since the prices of cigarettes here are supposed to be the lowest in the region? Perhaps this is true, but this situation is under the present tax system. With the new rates of taxing all types with only one rate the Low (which is increased by more than 1,000 percent) and Medium types of cigarettes become unaffordable to most of consumers. These consumers will patronize the smuggled types that are “tax-free” and of low cost. It is doubtful if the Bureau of Customs can effectively counter the smuggling issue. As of now, smuggling already exists in the Southern Philippines although still in a small scale.

The question remains: what does the government intend to pursue?

Does it want to eliminate or seriously limit the use of tobacco by Filipinos for health reasons? Surely, the measure is expected to reduce the manufacture of certain brands of cigarettes, but not the consumption by smokers.

Or does it want to eliminate monopolies by encouraging foreign investors engaged in cigarette manufacture?

If investments in cigarette manufacture are allowed and encouraged, then the government’s purpose is different – it would prefer to kill local businesses and tolerate the influx of imports. By the way, the British American Tobacco organization has a sullied reputation in dealing with governments and competition. We ought not to add to our problems by taking them in once again. It is easier to deal with a monopoly that is engaged in an unwanted but difficult industry to eradicate than allow a free market competition in the country.

SMOKERS, QUO VADIS?

Smoking is no longer a status symbol in our time.

I remember the old days when even sophisticated ladies were shown in the movies as brandishing long-stemmed cigarette holders to indicate their high social stature. Business tycoons had their cigars and tobacco pipes, and business meetings were filled with smoke. I used to be a military assistant to the late Executive Secretary Rafael Salas who used to carry along his tobacco pouch and pipe. On the other hand, we used to call ex-General and ex-President Fidel V. Ramos as “Tabacco” since he was in the habit of having a cigar stuck in his mouth.

These days, almost everywhere there are signs that prohibit smoking. Public conveyances, including the small tricycles, have the sign “no smoking” posted in their interiors. I have noticed that even the building where a tobacco company holds office has signs all over cautioning against smoking. There is also one municipality that prohibits smoking inside the house. Eventually, even smoking in the open spaces may be prohibited as cigarette smoke will add to the pollution and hasten climate catastrophes.

There was a time long long ago when tobacco was used for religious purposes. It seems that smoke emanating from tobacco symbolizes our worshipful spirits rising to the ever powerful deity in outer space. A scene had been memorialized when a peace process between the English colonists and Indians were consummated by smoking the peace pipe… and what was in that peace pipe but tobacco. That event was supposed to be during the time of Sir Walter Raleigh who introduced tobacco to England.

But developments in the industries made tobacco an ordinary commodity available to commoners and no longer an object as symbol of veneration. We now only have incense to produce smoke inside churches to rise to the skies.

Even as tobacco in cigarettes is being declared these days as dangerous to our health, instead of coming out with laws banning its use, our lawmakers still come up with laws that seek to make money out of it. And there are still big companies that compete and engage in “to the death struggles” to eliminate each other. Of late, House Bill 5727 being sponsored by Representative Abaya of Cavite seeks to reduce the different classes of cigarettes from four to one. All classes will be taxed P30 per pack regardless of quality. The new tax rate increases the High priced cigarettes by 2.5 times, the Medium by almost 4 times, and the Low by 11 times.

Lately, the international company, the British American Tobacco, is supporting a lobby to pass the Abaya bill in order to eliminate competition in the Philippines or to “level the playing field”. It has targeted the merged company, Philip Morris Fortune Tobacco Corporation, as its main opponent since BAT claims that PMFTC accounts for 94 per cent of the market.

The figures from the Bureau of Internal revenue for 2010 show otherwise. Assuming that PMFTC produces all the Medium and High priced cigarettes in the country, the data for 2010 show that it only produced 46 per cent of all cigarettes, while the Low end accounted for the rest, or 54 per cent. If the Low-priced cigarettes are included as products of PMFTC, the total quantity produced amounted to over 70 per cent only. On the other hand, in terms of revenues collected by the government, the combined Medium and High priced cigarettes accounted for 78 per cent.

Nonetheless, according to BAT this situation “levels the playing field” since it only produces cigarettes of the High end, namely, Lucky Strike and Pall Mall among others, in competition against PMFTC’s Philip Morris and Hope. The tax rates for the Low priced cigarettes will effectively wipe out or drown the manufacturers of this class, particularly the Mighty and the Associated Anglo American companies. These companies also produce the local brands that are packed in thirties, but are to be taxed at P30 per pack as well. These small companies may continue to survive by resizing their work forces. Or, they may sell out their facilities to BAT which claims and promises to install plants all over the country if the Abaya bill is passed.

If the Abaya bill is passed, heavily affected, as well, are consumers of the Low priced brands. As of now, these brands are taxed at P2.72 per pack but will have to eventually absorb the P30 tax rate. The economy has not improved the earning capacities of the consumers, and they therefore cannot afford the increased prices of cigarettes. They will have to look for alternative sources that may satisfy their cravings for nicotine. Under this situation, smugglers will find it lucrative to bring in their untaxed goods that may prove affordable than legitimate products. We may also expect brisk sales of cigarettes in the duty- and tax-free outlets at our airports.

The anti-smoking lobby may have occasion to rejoice since indications show that it is winning the war against smoking. They may even succeed in totally banning cigarettes, although lawmakers still would continue to “bleed” the industry to “death” with higher tax rates. However the retrenched workers, both in the direct or indirect sectors of the tobacco industry, may have to look for other means to earn their living. (I don’t see how BAT can prevail and survive the anti-smoking onslaughts by assailing its competitors instead of cooperating with them. Perhaps, its strategy is to appear being cooperative with the lawmakers in order to weave its way back and monopolize the local stream.)

For the tobacco farmers, they shall have to look for other agricultural products to plant, or invent a new way to use tobacco plants for medicine. Or possibly convert to producing snuff which still use tobacco but not to smoke it. We will see how the anti-smoking lobby will convert into an anti-snuff movement if only to persecute and exterminate the tobacco users.