The Philippine government should review excise tax levels on tobacco to prevent further declines in revenue collection and illicit trade, according to renowned international economist Dr. Arthur Laffer.
Tobacco excise tax collections in the Philippines dropped from P176 billion in 2021 to P160 billion in 2022 and P135 billion in 2023.
“The government should take steps to realign tobacco tax rates closer to the revenue-maximizing rate. Doubling down with further revenue-losing tax rate increases is never a sensible solution to a tax revenue loss,” said Laffer, a former member of President Ronald Reagan’s Economic Policy Advisory Board and founder and chairman of Laffer Associates, an economic research and consulting firm.
Data show that illicit cigarette trade incidence rose from 13.6 percent in 2021 to 15.2 percent in 2022. In 2023, it was recorded at 19.6 percent, according to Euromonitor.
Laffer said affordability issues brought about by the annual excise tax increases had resulted in consumers buying cheap, non-taxed tobacco products.
Laffer said that while the Philippines has, “in general, done a very good job of reforming its system of tobacco taxation from a complicated multi-tiered system to a simple structure with uniform tax levels for all cigarettes,” the tobacco excise tax rate has reached a “prohibitive range,” as evidenced by declining government revenue.
He said the ideal taxation system is one that raises the necessary revenues to run the government in the least damaging fashion possible.
Laffer said that in the case of tobacco excise taxes, “the mechanism that has resulted in continuous annual tax rate increases to achieve continuous revenue growth has clearly taken tax rates too high and has failed to generate the anticipated revenue.”
Laffer is the creator of the Laffer Curve, which illustrates the relationship between tax rates and government revenue. He calls for a tax system that raises the necessary revenue while minimizing economic damage.
“Tax revenues increase with increasing tax rates until a revenue-maximizing point is reached, after which further increases in tax rates result in declining tax revenue,” he said.
Laffer said the Philippines pushed tobacco tax rates past the point of revenue maximization on the Laffer Curve, and any further increases to the tax rate at this time would likely result in further revenue declines and increases in illicit trade.
He said that the proliferation of illicit trade is influenced by high tax rates coupled with low affordability and the probability of enforcement.
“Given the declining tax revenue and increased growth in the illicit trade of tobacco in the Philippines, it is time to reevaluate the optimal cigarette tax rate,” he said.
“By coupling tax base expansion with tax rate decreases, the Philippines can bolster and diversify tax revenue collection without jeopardizing economic growth,” he said.
Laffer commended the Philippines’ approach to taxing novel tobacco and nicotine products but urged the government to simplify its tax structure for e-cigarettes.
“Unlike other tobacco and nicotine products, e-cigarettes are taxed under a two-tiered system in the Philippines, which is leading to significant enforcement issues. Reforming e-cigarette taxation into a simplified uniform rate — as has been done for other tobacco and nicotine products — should be an immediate priority,” he said.
Laffer said other areas to consider include simplifying and rationalizing regulations for capital markets and the fiscal regime surrounding the mining sector. “Streamlining and simplifying the tax code is always positive for economic growth,” he said.
