DoF’s quixotic crusade against the evil weed

BY BEN KRITZ, TMT, Manila Times, Jun 2, 2019

IT is considered neither fashionable nor politically correct in this enlightened age to argue against a measure intended to reduce or eliminate tobacco use, but the borderline irrationality displayed by Finance Secretary Sonny Dominguez in his zealous campaign to rid the Philippines of the noxious stuff puts one in the awkward position of having to do just that.

Despite reliable evidence to the contrary and contrary to even basic logic, the Department of Finance (DoF) has continued to insist that a higher sin tax on tobacco products can achieve the divergent objectives of stamping out tobacco use and providing revenues for the soon to be implemented Universal Health Care (UHC) program. The current tax, which has been incrementally raised from P30 per pack of cigarettes to P35 over the past couple of years, is not achieving either of those goals. Smoking rates have only moderately declined, and tax revenues have consistently fallen short of the government’s targets; the UHC program, according to the DoF, is currently facing a funding gap of more than P400 billion over the next five years.

Perhaps recognizing that contradiction, Dominguez has lately focused more on the anti-tobacco aspect of the sin tax than its revenue generating objectives. Of the several bills introduced in Congress to raise the sin tax, Dominguez favored the one that would impose the largest immediate increase, from P35 to P60 per pack, with a nine percent annual increase after that. Although he did acknowledge the need for more revenue, Dominguez stressed that it was his intention to “kill” the tobacco industry, and that the current tax was not achieving that. Better economic conditions and higher wages meant that smokers were able to easily afford the moderately higher price of cigarettes at the P35 tax rate, he explained, thus the tax must be made higher than the rate of income growth.

And what of the livelihoods of tobacco farmers that would be eliminated by a draconian tax measure? Dominguez was largely unsympathetic. “If you’re not producing a good product you should not do it,” he said. “[The land] can be used for many other things, corn, sorghum, fruit trees. Those are better products.” A certain amount of the sin tax revenues shared with the four tobacco producing pro­vinces, about P15 billion annually under the current tax scheme, could be earmarked for crop diversification, he added.

That just about everything Dominguez said was wrong should be a reminder to policymakers to make choices based on objective judgment rather than sentiment.

First, the Finance chief needs to be disabused of the notion that sin tax rates and smoking prevalence are correlated, because they are not. Numerous studies have been done to try to find the connection, and have uniformly concluded that the effect of higher sin taxes are usually so small as to be statistically insignificant. A 2014 study published by the National Bureau of Economic Research, for instance, found that a tax increase of 100 percent would only decrease adult smoking rates by at most 5 percent.

Second, conversion of tobacco farms to ones that produce “better products” is a serious technical and financial challenge, one Dominguez’s glib comments seem to indicate the government is in no way prepared or capable to manage. As a crop, tobacco is very hard on the soil in which it is grown; once an area is planted in tobacco, the extent to which the crop leaches nutrients from the ground renders it unusable for anything other than tobacco for a number of years, unless massive intervention with fertilizers is carried out. Tobacco farmers in the US who have tried to diversify their crops have only been modestly successful; according to a recent article in the journal Farm Progress, about the only crop that seems to work well in place of tobacco in the prime growing areas of Virginia and North Carolina is cabbage.

The dismissive “just plant something else” suggestion also overlooks the profitability of tobacco. Being a tough crop, tobacco can withstand conditions that cause many other harvests to fail, and sells at a much higher farmgate price than almost every alternative crop. Even if a local farmer can successfully harvest a different crop, he will still be penalized by a significant drop in income.
That is why most tobacco farmers in the US, who are changing their business, are not switching to different crops. Staying with tobacco and finding different markets for it — it is useful as feed stock for biofuels, and in pesticide manufacture — or getting out of farming altogether and converting their land to solar energy production.

Finally, the DoF chief just cannot seem to escape the economic klein bottle of assuming revenue from a source that, by intention if not by rational design, should constantly decrease. Using revenue generated by the tobacco growing sector to fund that sector’s destruction is illogical; even if successful, the lower profitability of replacement crops would irretrievably remove much of that sector’s value.

Tobacco is a high-value commodity for which demand is highly inelastic, and in that sense is a good source of tax revenue. So long as the revenue is viewed as potentially variable, budgeted based on actual receipts rather than projections, other more effective programs to curb smoking such as educational programs for young people, and enforcing age and other restrictions on its use can be carried out in parallel to tax collection efforts. The result would be something of a happy medium, probably not at all satisfactory to anyone, but the most practical outcome that could be achieved.

ben.kritz@manilatimes.net