From: Malaya Business Insight
Written by DUCKY PAREDES
‘(I)f you raise taxes too high and too fast, you’ll create a tax shock. And you will push the legitimate legal market to the illegitimate market and foster illicit trade.’
A VISITING foreign tax expert recently affirmed what a lot of people, including some of our senators, have been telling our Department of Finance (DoF) about the more likely possibility that imposing higher taxes on alcohol and tobacco will more probably increase illicit trade. In other words, smuggling.
Daniel Witt, the president of the International Tax and Investment Center (ITIC), says that taxing cigarettes too high (as Congress is contemplating at the insistence of our DoF), will unavoidably lead to an increase in illicit trade.
Witt was here as a guest of the Department of Finance, whose chief, Cesar Purisima, is pushing Congress to adopt the proposal for a 1,000 percent hike in cigarette excise taxes. Witt helped organize the 9th Asia Pacific Tax Forum held in Manila along with the DOF from October 3-5.
Being an expert, Witt was interviewed by ANC’s Coco Alcuaz to get his views on various pending tax proposals of the Aquino administration, such as the plans to increase the government’s revenue share in the mining industry and the increase in the sin tax.
Witt’s views on the proposal to drastically increase sin taxes is no different from what Senator Ralph Recto and Senate President Juan Ponce Enrile have been saying on the issue. “It’s all about (striking a) balance,” was how Witt described the way government should deal with its plan to raise sin taxes.
“You need to look at the imbalance — the revenue interest and the health objectives, but with fast moving goods like distilled spirits, like tobacco, even petrol products in this part of the world, you need to be acutely aware of the risk of illicit trade,” Witt says.
Witt also points out that “if you raise taxes too high and too fast, you’ll create a tax shock. And you will push the legitimate legal market to the illegitimate market and foster illicit trade.”
He noted that the ITIC “has done a lot of work” on the impact of high cigarette taxes on illicit trade over the years. Witt points out that ITIC’s studies of high tobacco taxes in relation to illicit trade in the European Union support his statement. In the various
studies that ITIC has conducted, it found out that the guiding principles to ensure the success of any new tax measure on sin products are “simplicity and transparency,” he said. “And yes, indeed, there is room to grow, but do it in a gradual way so you don’t destabilize the market, you get more revenue, you do have the impact to achieve to help advance your tax objective.”
An ITIC report titled “The Illicit Trade in Tobacco Products and How to Tackle It” validates Witt’s pronouncements. “Experience shows that radical excise ‘shocks’ are more likely to lead to the emergence or growth of illicit trade,” says the ITIC study.
In its study, the ITIC notes that cigarettes are easily smuggled because these goods are easy to transport and pose low risks to those involved in the activity owing to weak sanctions, inadequate enforcement, and the low focus on this illicit trade due to other priorities like drug trafficking and human smuggling.
Establishing its findings that a high tobacco tax policy triggers the emergence of illegal trade, the ITIC study said it is “critical that governments balance their approach in the setting of excise tax rates with the aim of optimizing tax revenues in the long term and avoiding the development of an illicit market.”
These are the exact, same views aired by Recto, who chairs the Senate’s ways and means committee, the Senate panel which conducted several hearings on the proposed sin tax hike. Recto, like Enrile, points out the need to come up with a “median” point or middle ground that would ensure the government optimizes tax collections from sin products while keeping smuggling in check. Recto also took into consideration the plight of tobacco farmers and other small stakeholders that would be affected by the tax hike.
Yet in trying to strike a balance like what Witt points to as the key to ensure the success of the government’s tax plan, the Senate is under attack from anti-tobacco groups who describe Recto’s judicious and levelheaded stance as watering down the bill. These groups may think that their refusal to budge from their position is “being principled.” I call it being hard-headed and dense.
Rejecting findings from studies and the experience of other countries and the wide counsel of a globally recognized tax expert is simply being silly and narrow-minded about the issue.
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Is there smuggling in other places where the tax on tobacco has been increased?
From 2007 to last year, in the United States, 27 states raised their cigarette taxes. Michigan’s Mackinac Center for Public Policy that closely tracks tobacco tax rates, sees tobacco smuggling as an “unintended consequence of high cigarette taxes.”
Is there cigarette smuggling in the U.S.? Of course. For example,
in low-tax states such as Virginia, cigarettes cost about $4.50 a pack.
Smugglers buy truckloads of Marlboros in Virginia to sell in New York where, because of higher state taxes, the same pack sells for $13. New York is the highest tobacco taxing jurisdiction in the U.S.
Smuggling costs states and the federal government about $5 billion a year. according to US government estimates.
Last year, the ATF (Bureau of Alcohol, Tobacco, Firearms and Explosives), a federal agency, reported 357 open cases
involving tobacco smuggling, compared with only a handful a decade earlier.
During the 2010 fiscal year, the Justice Department reported 71 new prosecutions referred by the ATF, a 39% increase from the year before, according to records compiled by the Transactional Records Access Clearinghouse at Syracuse University in New York.
Seizures of cash and property have also been rising, from $11 million in the 2007 fiscal year to $31.5 million in the 2009 fiscal year. This is in the USA.
One has to wonder how we will be doing a year after we increase the tax on tobacco by 1,000%, with so much of the Philippines open to the sea and cigarette smuggling a thriving cottage industry in Cavite and most of the Visayas and Mindanao as recently as the 1970s?
