The paper analyzes the excise tax structure of cigarettes, the trends in the volume of removals and collection performance from 2000 to 2009. It also estimates the elasticity of demand for cigarettes based on available data on prices of cigarettes from 2000 to 2009. The results may serve as inputs to any proposal on excise tax on cigarettes.
Over the years, the excise tax on cigarettes has been the object of frequent revisions, i.e., changing the form of taxation from pure specific tax (SPT) to ad valorem tax (AVT) or to a combination of the SPT and AVT and vice versa; and changing the tax bases and rates. The present tax law governing the excise taxation of cigarettes is RA 9334, otherwise known as the "The Sin Tax Law” which increased the excise tax effective 2005 and provided for increases every two years until 2011.
Total excise tax collections on cigarettes grew from P 17.41 billion in 2000 to P 23.88 billion in 2009, registering a total growth of 36.59% over the ten-year period. The bulk of the collections is sourced from cigarettes packed in 20’s with less than one-half percent contribution from cigarettes packed in 30’s. Among the cigarettes packed in 20’s, the bulk of collections came from high-priced cigarettes, contributing over 60% of the total collections except in 2007; followed by medium-priced cigarettes with over 20% contribution except in 2006, 2008 and 2009; and lastly, low-priced cigarettes, significant contributions of which were noted in 2005-2009 due to the implementation of the increased tax under RA 9334. In particular, the contribution of low-priced cigarettes in 2009 reached P 5.66 billion or over 23% of the total collection, surpassing the collection from medium-priced cigarettes amounting to only P 3.66 billion during the year.
Total volume of removals of cigarettes from production sites reached 4.11 billion packs in 2009. The highest removals of 4.83 billion packs occurred in 2004, one year before the increase in excise taxes under RA 9334 was implemented. This behavior continued to occur in the years 2006 and 2008, which were also the years before the increase in excise taxes under the same law was implemented. "Front-loading” in the immediately preceding year has been a general behavior of cigarette manufacturers whenever there are increases in excise taxes.
The overall price elasticity of demand stood at -0.5759. This value is the overall net effect of price increases; reduction in consumption; shifting of smokers to cheaper brands; partial absorption of price increases; and addition of new smokers, to total demand for cigarettes. By major price category of cigarettes, however, the regression for demand vis-Ã -vis price displayed varying results. For instance, the demand for medium-priced brands is highly price elastic at -3.0405 which implies that an increase in price will result in a significant drop in the demand. Smokers of these brands generally respond to price increases either by reducing consumption or by shifting to cheaper brands. For high-priced brands, on the other hand, the demand is price-inelastic at -0.2635 which indicates that an increase in price will result in a moderate decrease in demand. This implies that smokers of these brands generally have higher income and the capacity to partially absorb the increases in the price as they continue patronizing the high-priced brands. Lastly, for the low-priced brands, the findings indicate an increasing demand as prices go up which is contrary to the general behavior of consumers. However, an in-depth analysis and in consideration of the findings on the sensitivity of smokers of other brands of cigarettes to price changes, the increase in the demand for low-priced brands is actually attributed to the shift of smokers of medium-priced brands to low priced brands. It can also be a fact that they generally become the testing brands of new smokers especially in the rural areas. It was noted in the study that there was a continuous increase in the number of new smokers yearly.
Based on the computed elasticity estimates, any proposal to increase the tax on cigarettes, despite the varying responses of different categories of smokers, will still result in increased tax revenue. While there are indications that corollary to such an increase, there will be a reduction in the demand among all categories of cigarette smokers also at varying degrees, the end result is still desirable, considering that it will help the government reduce its costs in subsidizing smokers who have less financial capabilities to treat tobacco-related diseases. Moreover, there is always a possibility that an increased tax on smoking will eventually discourage or reduce smoking especially among the young ones and beginners. Recent proposals on the restructuring of the excise tax on cigarettes and those filed during the previous Congress, if reconsidered by the present administration, will therefore help the government achieve the twin goals of generating additional revenue and discouraging smoking.
