Sponsorship Speech
October 10, 2012

Sponsorship Speech of Sen. Ralph G. Recto
on SB No. 3299 Under Committee Report No. 411

Committee on Ways and Means

Please Check Against Delivery

Mr. President : No Senate was ever a bulwark of taxation. This one has never been.

To every overture of a new tax, its reply has never been of ratification but of restraint.

The Senate's role has always been to temper, not top, executive proposals. We have never treated taxation as an auction where we must outbid the executive.

We have maintained that stance because we recognize that, while paying taxes may be the first duty of citizenship, ordering more of it should be Congress's last.

It is a duty we will carry out, not with relish, but with reluctance, but carry it out nonetheless, because we have insisted that to fund the government's growing needs, new taxes will not be the first option but the last.

And there's one more reason: The measure we are about to debate poses a deterrent that will keep people from being sick and will generate revenues that will treat them when they get sick.

My dear colleagues:

We couldn't have chosen a better time to discuss this bill than on the eve of national budget deliberations.

If revenues underpin expenditures, then this bill is the perfect curtain raiser for the budget debates. This is so because taxation is what makes appropriations possible.

While the P2 trillion 2013 budget catalogues projects in boldface fonts, there are no fine print detailing the taxes that would finance them.

P75 billion

What is disclosed in the proposed budget are its virtues. What is not is the fact that it will be financed in part by the tax on vices.

For next year, smokers and drinkers, and those who manufacture their objects of affection, will chip in P75 billion to translate the prose of the budget into actual programs.

One peso for every 20 pesos that the BIR will try to collect next year will come from consumers of sin products, whose payment of an excise tax and VAT is their act of contrition.

If we will approve this bill, their contributions will even go higher.

The truth is, next year's budget is no different from previous ones. A hundred years ago, in 1912, 30% of what the government spent came from tobacco and liquor levies.

Last year, excise tax collection on one beer product alone, Red Horse, was a frothy P8.6 billion, enough to fund all of our firemen's need that year.

Ginebra lovers downed their bilogs and in the process paid P1.5 billion in excise tax, enough to construct one classroom in every town and city in the country.

Those who took a swig of Emperador brandy, on the other hand, left a P1 billion tip to the government, more than enough to shoulder the annual pension of 139,000 poor seniors.

Historical addiction

Historically, our people's fondness for the bottle had always been matched by government's intaxication with alcohol taxes. And whether ruled by despots or democrats, all governments since the birth of our Republic had been addicted to tobacco tax.

The reason for this is simple: a government in need of money would always prefer a taxable vice, like drinking, to a tax-exempt virtue like staying sober.

Through the years, taxing cigarette and liquor has always been the easiest way for a government to get a fiscal high, so it was often done, the justification being that what one pays for smoking cigar or gulping beer is more of a fine than a tax.

This remains true today. Watering holes are bottomless wells of liquor tax. And as long as people light up, cigarettes are an inextinguishable source of public money.

Intaxicated with liquor taxes

Mr. President:

We are a nation of drinkers. Or let me qualify that - a nation of moderate drinkers.

In gin consumption, for example, we are not just a barangay, but a republika. Iba rin ang pinagsamahan ng Pinoy at ng kanyang serbesa.

The tax code classifies alcohol products into three. Distilled spirits such as brandy, whiskey, rum, gin, vodka. Wines, such as sparkling wine, champagne, still wine, fortified wine. Fermented liquor such as lager, beer, pale pilsen, porter, tuba, basi, tapuy.

In 2011, we gulped down 1.56 billion liters of beer, and sipped 255 million liters of gin, rum, brandy, whiskey and other distilled spirits.

The average annual consumption of beer is 17.4 liters per person, which I think most of us here surpass as some can drink a vineyard's worth of wine and a microbrewery of beer in a month.

The national consumption of alcohol last year was actually higher, if we counted the tuba and lambanog we have been imbibing since the time of Magellan.

This was the volume. As to the value, the alcohol industry posted gross sales of P124 billion that year - P67 billion from fermented liquor, P57 billion from distilled spirits and P263 million from wine.

Out of this gross sales of P124 billion, government was able to collect P42 billion in taxes - P30 billion from fermented liquor, P12 billion from distilled spirits and at least P35 million from wine.

I said "at least", because the data on wine taxes came from the BIR, because no matter how hard we tried to extract it from them, the Bureau of Customs, like a waterfront drunk, has no memory, no record, not just of wine imports but of all alcohol imports.

Higher than power, telecoms

Of the P30 billion in taxes paid by the fermented liquor sector, P19 billion was in excise tax. The rest was in VAT, corporate income and other taxes.

This translates to a total tax burden of 45 percent.

Or this can be viewed this way: If someone gargles a barrel of beer and pays P100 for it, P45 will go the national coffers.

Of the P12 billion in taxes paid by the distilled spirits sector, P5.2 billion was in excise tax. The rest was in VAT, corporate income and other taxes.

This translates to a total tax burden of 21 percent.

The overall tax-to-gross sales ratio of the industry - fermented and distilled combined, is 34 percent, higher than the tax burden rates of telecoms 15%, power 15% and automobiles 4 %.

The alcohol industry's tax contribution was made possible by the existing tax rates I will show you now -- for distilled spirits, (PAUSE) wine, (PAUSE) and fermented liquor (PAUSE) which are detailed in the slides.

I have also included an industry scan, who the major corporations are, (PAUSE) their products, (PAUSE) so those who will go into the hustings in the coming months will know what the people they're courting are drinking.

Let me close this chapter by pointing out that these huge revenues were derived from a thin sliver of family expenditures. For every 100 pesos spent, a miniscule 70 centavos went to alcohol.

Addicted to tobacco tax

Now let us go to tobacco.

Although the current excise tax debate has generated heat, tobacco data has never been enveloped in smoke.

The indisputable facts are: 92 billion sticks or 4.6 billion packs were sold last year. 17.3 million Filipinos smoke. Well, including the country's most eligible bachelor.

Each smoker, on the average, consumes 13 sticks a day. Nine in ten sticks were sold in sarisari stores. Six in ten by tingi.

Tobacco gross sales reached P89.3 billion last year. Of this, P87 billion was generated by cigarettes machine-packed in 20s. The rest came from cigarettes packed by hand (P1.4 billion), cigars (P75.6 million) and manufactured tobacco (P827 million).

You will notice that cigarettes packed by machines dominate the market with a share of 97 percent.

Smokers coughed up P25.8 billion in excise tax, which, save for P300 million, came from those who smoke machine-packed cigarettes.

VAT adds another P5.6 billion and if income and other taxes are included, the final tally is P35.6 billion.

This yield was taken from a .8 percent share of the average household budget. This means that a mere 80 centavos for every 100 pesos spent by a family went to cigarettes.

Government takes 40 %

This translates to a tax burden of 40 percent.

Simply put, 40 centavos of every piso one gives the yosi boy ends up in the government coffers.

Tobacco products are currently assessed the following rates. (Specify products and rates.)

The next slide will show the excise tax rates of cigarettes packed by machine, (PAUSE) the removals, (PAUSE) and the excise tax collected per tier. (PAUSE) As can be gleaned from the slides, volume-wise, the "low" bracket tops the field with removals of 3 billion packs and a corresponding excise tax payment of P8.1 billion.

But collection-wise, it is cigarettes classified as "high" which yield the most revenues at P13.9 billion out of a smaller volume of 1.15 billion packs.

Now let me walk you through the corporations in the tobacco world, (PAUSE) their popular brands, (PAUSE) and market share. (PAUSE)

People, not companies, pay

Before you rush to the conclusion that these companies pay the excise tax, don't. Remember that they're just collecting agents of the government.

This is so because under our system, it is the consumers, not the manufacturers, who eventually shoulder the excise tax, on account of its nature as a pass-on tax.

Thus, contrary to the myth, the higher tax we are mulling will not be levied on a couple of taipans, or a foreign tobacco colossus, or a beer giant.

The ones who will ultimately bear the additional tax burden are ordinary folks, like the worker who likes to cap his day with a cocktail of rum and coke or the call center employee who grabs a bottle of ice cold beer before he hits the road.

In short, we are not taxing companies here but people. In the end, it is not big tobacco or the giant brewery who will pay, but small people.

For this bill, in essence, is class taxation for sinners, the 17 million who smoke and the many more who drink.

Tax is penance for 'sin'

Still, we are raising the cost of their permit to smoke and drink because of the social and health ills associated with alcohol and tobacco use.

Government books may show the huge revenues credited to tobacco and alcohol sales. But what must be debited against this is the toll in human lives that addiction to these products cause.

Therefore, it is not enough that we appreciate the revenue ledgers alone. We must also look at the tally of lives lost and the economic cost in treating diseases these two products inflict.

And if sin products indeed carry a misery index so high that it can't be assuaged by high revenues, then the solution is not to tax them severely but to ban them completely.

If the social injury they cause is greater than the tax they contribute, then government should stop asking money from those who pack cigarettes and bottle the six-pack and should instead tell them to pack up and go.

There is policy incoherence in calling sin products cancer-causing and yet demand a higher cut from their sales and justify that share as an anti-cancer tax.

Cigarette smoking, like a cigarette butt, should be crushed. In a perfect universe, perhaps. But in the real world, impossible.

The reality is that we have a government that is addicted to cigarette tax. It needs the fiscal equivalent of a nicotine fix. If we ban cigarettes, this government will weaken from lack of cigarette taxes. That would be the real fiscal shock.

More bucks out of fewer packs

So the next best thing is to use tax policy as a nicotine patch to discourage smoking and to keep drunks from marinating their livers in alcohol.

And the bill I am proposing, as I will explain later, will do just that. It will decrease tobacco sales and yet deposit more money in government coffers. It seeks to get more bucks out of fewer packs.

That would, however, require a careful calibration of rates.

The danger of pushing taxes up too much is that it may reach the point of diminishing tax returns. As in any product, a higher tax rate does not automatically result in higher collections.

We can, for example, peg a P100 tax per pack of cigarettes, or a P100 tax on a bottle of beer and the simple math would show: "Presto, our deficit is gone!" But that won't be, because such a tax would impose a de facto prohibition on cigarettes leading to less sales and lesser taxes.

Moreover, under a regime of super high sin taxes, the local players will be taxed to extinction, or elbowed out of the market by foreign-made tobacco and alcohol products. The void will be filled by smugglers.

And as the next slides will show, smugglers flocked to countries which erected high cigarette taxes. (PAUSE LONGER) And a leading local economist warned that it could happen here.

If we use taxes to kill local beer and cigarette makers, are we prepared to shell out $6 billion for our alcohol and tobacco needs a year? Are we willing to outsource even the manufacture of sin to distant lands?


With the above as guideposts, we proceeded to craft new tax rates. In addition, we imposed the following benchmarks of success:

It must raise more money out of lower volume thus meeting the important requirement of using taxes as a deterrent to the consumption of unhealthy products.

It must create a predictable, dependable and reliable stream of revenues.

It must dismantle the annexes.

It must herald the imposition of a unitary tax rate.

It must index annual tax increases to inflation.

It must generously earmark portion of the proceeds to health care programs.

New sin tax regime

The first step in designing a new tax regime is to dismantle the annexes. All brands will shed their protection.

Second, is to index tax rates to inflation so they can rise together. Under our proposal the adjustment will be made every two years.

This will be effected through a BIR survey of 10 major supermarkets every two years. The average net retail price of every cigarette and alcohol brands canvassed will be the basis of the tax adjustments.

Products that will be introduced in the market after the effectivity of the new excise tax schedules will be initially classified using the suggested net retail price as shown in the sworn statement submitted to the BIR and taxed under the applicable schedule.

As to the proposal by the Department of Finance to immediately fuse the rates into one, we cannot embrace it. We believe that the variety of products sold should beget a variation of taxes.

In pegging revenue yield, we adopted a conservative framework that we believe hedges closer to reality. The problem with forecasting revenues using rosy lenses is that they often leave the government in the red.

Mr. President, what we are presenting today is a reasonable, realistic and responsible rendering of our power to tax the industry of alcohol and cigarettes.

The original version peddles the promise of P60 billion in incremental revenues for the first year.

Unfortunately, subsequent "revenue scenarios" drawn up by government tax experts using elasticity tests and average industry growth produced yields way below what was promised.

In one run, the increment was even forecast at P23 billion, an almost two-third shrinkage from what was originally ballyhooed.

As I will show later, the revenue projections of your Committee were not plucked out of thin air but were faithfully based on the submissions of the BIR.

They were later enriched and validated during consultations with stakeholders and other affected sectors.

Let us go to a sector-by-sector discussion of the proposed amendments.

Happy WTO Gods

In taxing distilled spirits, we are introducing new rates that will be WTO-compliant and please the trading gods. In the first year of the new law's implementation, we are proposing to immediately slash by half the tax rate slapped on imported distilled spirits to stop Western ranting against unfair taxes.

Distilled Spirits

The classification of distilled spirits, however, will remain in the first two years but the excise tax rates of those currently paying P14.68 per proof liter shall be increased to P20.00 -- representing a 36% hike -- on local spirits.

As imported and local distilled spirits compete for their share of the market, it should not be surprising to find them cozying up in one bed together either in the low-priced or mid-priced range.

To honor WTO commitments, we are not mentioning "raw materials" as basis of taxing distilled spirits and would just innovate a provision that would simply refer to the tax liabilities of distilled spirits for classification.

Thus, the following schedule: Distilled spirits with net retail price less than ninety pesos (P90.00) will have a P20.00 tax.

Those priced between P90 and P150 will have an P80.00 tax.

Those between P150 and P250 - P160 tax; and those whose net retail price is more than P250, the tax rate will be P320.

This structure will be mirrored every two (2) years, with the NRP cut-offs as well as the excise tax rates increasing by eight percent .

The structure for wines is as follows: for those with net retail price not more than P500, P250; and P700 for wines whose net retail price is more than P500.

Carbonated wines will now be included in the excise tax net, along with still wines.

The tax on these wines will be increased by 36% for the first year.

The NRP cut-offs as well as the excise tax rates shall also be increased by eight percent (8%).

The tax on fortified wines will be based on the alcohol content and taxed as distilled spirits.

An added provision is that the tax shall be at least P80 per proof liter.

For distilled spirits, our projected incremental revenue in the first year is P1.38 billion on excise taxes alone. VAT, which will shadow the increase, not factored in.

Fermented Wisdom

We are bowing to the "fermented wisdom" of our colleagues in the House of Representatives as far as the excise tax on beer products is concerned -- but with a minor twist.

The current three-tier regime will be collapsed into two tiers using the per liter net retail price cut-off at P50.60 effective March 1, 2013.

Beer products whose net retail price is not more than P50.60 shall be taxed at P13.75, while those with higher than P50.60, will get a tax of P18.80.

The tax on beer brewed and sold in micro-breweries shall be increased by 36%, from P20.57 to P28 per liter.

The tax rates will be increased every two (2) years.

For fermented liquor, the above rates will brew for the government P3.81 billion in fresh revenues on the first year alone.

Phantom of the tier

We come to the most controversial part of this piece of legislation - taxing tobacco.

Beginning March 1, 2013, the tax on a kilo of tobacco prepared but not for chewing would be increased by a hefty 47 percent.

The tax on a kilo of tobacco prepared for chewing shall be hiked by a sizeable 60 percent.

For cigars, the current 2-tiered NRP-based structure shall be retained, but the ad valorem rates shall be increased starting March 1, 2013.

The tax rate shall be increased by more than 100 percent.

Hand-packed cigarettes will have a tax increase of 121percent from P2.72 to P6 per pack beginning March 1, 2013.

Our proposal is to have three tiers for cigarettes with the fourth "phantom" tier gradually going up in smoke and ultimately folding up with two tiers later.

As the low-priced and mid-priced brands play catch up with higher brands, more tiers will collapse to pave way for an ultimate two-tier system.

While the tax on premium cigarettes will be reduced to P14 - representing a 51% drop in excise tax due per pack on the first two years, the tax on other classifications of machine-packed cigarettes will be increased.

In particular, low-priced cigarettes will be imposed a significant 121% hike from P2.72 to P6 per pack of 20s; mid-priced cigarettes, a 32% rise from P7.56 to a P10 tax; and high-priced cigarettes, a 17% increase from P12 to P14 tax per pack.

Starting March 1, 2015, the restructured system will be reformed so that the net retail price cut-offs shall be P15 and P18 per pack of 20s and the excise tax rates increased.

Thus, cigarettes with a net retail price of less than P15 will be taxed at P7.50; those priced between P15 and P18, a tax of P10.50; and those priced (excluding taxes) at more than P18, P14.50.

These new rates will result in incremental revenues of P9.8 billion on the first year alone.

To recap, the incremental revenues from both alcohol and tobacco will be P15 billion in the first year.


However, this will just be the beginning of an unending taxing season. This bill lays down the roadmap for future increases.

Every two (2) years, the NRP cut-offs shall be increased by 8%.

As earlier promised, these series of biennial tax increases will result in only two (2) tiers starting on March 1, 2020.

Submission of further amendments by this body or in the bicameral panel may still leave us with only single tier by 2020.

Earmarking the wages of sin

Our proposal is not just to earmark the incremental revenues but the entire excise tax collections from alcohol and tobacco.

To give you an idea of how much it will be, last year's collections reached P50 billion, a haul which is on track of being surpassed this year.

This measure adds P15 billion on the first year. Whatever the final amount that will be plowed back to taxpayers, it will be at a level that will improve the lot of beneficiaries.

This bill identifies a raft of recipients who will receive the rebates. True to its billing, most are health-related mandates, from Philhealth premiums for the poor to rural hospitals.

There will also be something for tobacco farmers, to ease their transition to other crops, because as a colleague had succinctly said, they should not be left, like the leaves they grow, to hang out and dry.

On top of the usual earmarks in Republic Act 7171 for provinces producing Virginia tobacco, we propose that P1 billion a year be given to provinces producing burley and native tobacco. This will be used exclusively to develop alternative livelihood for tobacco farmers and workers. Hopefully, if the growing stops the smoking does too.

Our bill likewise earmarks 50 percent of the total sin tax proceeds to the public health sector, which amounts to roughly P33 billion, of which 40 percent will go to PhilHealth to benefit at least 10.4 million families.

The balance of 10 percent, or P6.5 billion, will be equally distributed among regional hospitals of the DOH and district hospitals run LGUs.

Thus each of the 16 regional hospitals will receive P200 million while each of the 618 LGU-run district hospitals will get P5.25 million annually.

Ultimately, to check against the ningas cogon mentality of our countrymen and leaders in kicking the national habit of smoking and drinking, your Committee proposes the allocation of P100 million yearly to fund a nationwide information and education campaign on the dangers of smoking and drinking to be administered by the DOH.

Mr. President :

There are many things that this bill is not, and let me put forward the following disclaimers :

This bill will not stop drinking. This is not a helmet that will protect the head of drunk bikers.

This will not wipe out tobacco from the face of the earth. Extinction of vices cannot be effected through taxation.

This bill is not the magic pill that will restore the fiscal health of the government either. Other industries must do their share, not through a round of new taxes, but by shutting down the loopholes through which their companies breathe.

Mr. President :

Two of the hardest things a Senate can do is to vote for war and vote for new taxes. Both are so dreadful that none of those who had sat in this chamber ran on a promise to seek one or the other.

Lalo na sa isang batas na papataw ng buwis hindi sa mga dambuhalang kumpanya pero sa ordinaryong mamamayan

Because of this, some of our colleagues have warned me that the proposed rates are too low. And a few have said that they will not vote for a measure that will impose rates that are too high.

Let us therefore venture into the nooks and crannies of this bill which, if it had a Facebook account, will sport this status : "It's complicated."

After that, using facts, let us refine, increase, decrease, amend the rates and provisions in this bill.

Let me remind you that what we are about to do is not just a simple tax computing exercise. This is, to a great degree, a price-setting exercise covering these two products.

Kaya ang importante ay lahat tayo makilahok sapagkat ito'y isang proseso na magtatakda ng presyo ng mga nasabing bilihin, kung ang presyo ba ng serbesa na iinumin sa mga binyagan at kasalan, ang rum na itatagay ng mga magkakaibigan ngayong pasko, kasama na rin ang yosi kadiri, ay sapat ba o kulang.

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