KEY POINTS

From our experience, we learned that unwavering leadership and support from the highest
levels, a whole-of-government approach, and the constructive engagement of all stakeholders is
the formula for success of any reform. (In our case, CONGRESS first)

Under the Sin Tax Reform Act, the excise tax on cigarettes will plateau in 2017 following four
years of progressive increases. Cigarettes will then be taxed at a single unitary rate with
annual increases of 4 percent. Although this ensures an automatic upward adjustment in the
excise tax, it may not be sufficient to keep pace with the increasing real incomes of Filipinos.

Falling real taxes and growing incomes in the Philippines meant that tobacco and alcohol
products were widely accessible and affordable.

The excise regime granted special low grandfathered rates to certain cigarette producers,
suffered from a lack of inflation indexing, and fostered an increasingly monopolistic market.

The multiple excise tierswhich varied by pricecreated the temptation for downshifting
(reclassification) to lower price tiers to avoid taxes.

The reform scaled up health care financing, nearly doubling the Department of Healths (DOH)
budget in its first year of implementation and financing the extension of fully subsidized
health insurance to the poorest 40 percent of the population.

Framing the reform as a health measure rather than tax measure helped its success.

Open and systematic monitoring will be critical to the success of the STL and ensuring
effective implementation.

Considering progress made on the implementation of the Sin Tax Law (STL) to date, we
recommend the following priority actions for consideration:
1. Conduct an annual review of the monitoring framework, and take early action on data gaps
or concerns about the STLs implementation on both the tax and expenditure side. The analysis
will require timely disclosure by the government of key data on tobacco and alcohol markets,
revenues collected from the sin tax, and direct and indirect health expenditure impacts.
2. Ensure the continued success of the tax stamp system, complemented by enhanced
administrative oversight of the tobacco industry and strengthen security features as any
vulnerabilities emerge to reduce the potential for smuggling and domestic-based tax evasion.
3. Make sure that the poor and near-poor who are eligible for free health insurance are
informed of their entitlements and benefits. Providing them health insurance cards could be a
quick win.
4. Ensure financial sustainability of STL earmarking by strengthening PhilHealths actuarial
capacity and information systems, and institutionalizing a rolling three-to-five-year Medium-
Term Expenditure Framework in the Department of Health.
5. Design and implement health awareness campaigns to reinforce the health objectives of tax
increases, namely to reduce smoking incidence and excessive drinking, especially among the
youth. (THIS!)
6. Enhance transparency and accountability of budgets and expenditures for investments in
tobacco-growing regions financed by sin tax earmarks.
7. Sustain a broad coalition of civil society and continue the legislative engagement and
support for the effective implementation of the STL and its objectives related to health, social
contract financing, and good governance. (AND THIS!)

From 2000 to 2012, the price of cigarette was decreasing rapidly. But after the implementation
of Sin Tax Law in 2013, a general increase was observed. However, prices are still significantly
lower compared to other middle-income countries in the ASEAN region. After adjusting the
prices to living standards (purchasing power parity), cigarettes are still much cheaper in the
Philippines compared to Thailand, Singapore, Malaysia, and Vietnam.

Using the Blecher and van Walbeek formula, from 2000 to 2012, cigarette (both local and
foreign brands) became more affordable each year as shown by the annual decrease in Relative
Income Prices (RIP). After the Sin Tax Law took effect, RIP noticeably increased.
Using the Kan formula (cigarette price divided by average daily salary), a similar pattern can also
be observed. RIP was decreasing from 2000 to 2012, until it increased in 2013. RIP rose for both
agricultural and non-agricultural sector workers, but more markedly so for the former.

Regular monitoring of affordability of cigarette must be conducted. While the Sin Tax Law has
led to the increase in RIP, there is great likelihood that it will stagnate or even decrease in the
succeeding years as GDP and household income grow relative to the suggested annual
increase in the price of cigarette. Based on the calculations from this study, which takes into
account the inflation and economic growth, the annual increase in the price of cigarette to
keep it less affordable should be at 11 percent, way higher than the 4 percent stipulated in the
Sin Tax Law.
The Philippines should continue to strengthen the implementation of the countrys
comprehensive tobacco control strategy as enshrined in the Framework (Framework Convention
for Tobacco Control) to supplement the tax reform.
 The smoking prevalence in the Philippines is one of the highest in the region next only to
Indonesia (WHO). Such prevalence is inversely related to socio-economic status, i.e. the
proportion of smokers is higher among the poorer segments of the population (Ulep, 2012).

Econometric studies conducted in different country contexts reveal the significant impact of
tobacco taxation on consumption, especially among the poor. In the case of Mexico, a 10%
increase in cigarette tax yielded a 6.4% decrease in the consumption of cigarettes. Meanwhile,
in Thailand, the government decided to increase the excise tax in 1994. After a decade, the tax
policy resulted in additional USD1 billion tax revenue as well as reduced smoking prevalence
across all age groups (Meier and Licari, 1997; Chapman and Richardson, 1990; Hu and Mao,
2002 and Jimenez et al, 2002).

The prices of cigarette in the Philippines are among the lowest in the ASEAN region.

As evidenced by the analysis presented in the earlier section, cigarette prices in the Philippines
have become more affordable over time. Cigarette consumption will then remain high if the
cigarette prices in the country are not adjusted for inflation and the income growth.

The Sin Tax Law stipulates that the price of cigarette should increase by 4 percent annually,
while published documents suggest that an annual increase of more than 5 percent is needed
to make cigarette less affordable over time.