EFFECTS OF RA 10351 (SIN TAX LAW) TO GOVERNMENT REVENUE AND THE

TOBACCO INDUSTRY IN THE PHILIPPINES

A Theoretical and Conceptual Framework Paper

Presented to

Department of Economics
College of Arts and Sciences
San Beda University, Manila

A Paper Submitted by:

Racho, Juabilly Gabriel II M.

In Partial fulfillment
For the course Intermediate Microeconomics

October 18, 2019

 Section 1
INTRODUCTION

This section aims to explain the motivation of the paper, define the problem and indicate the
specific theoretical and conceptual frameworks to be used, and imply the goals and propositions
that the paper aims to achieve.

1.1 One of the products that tobacco leaves produce are cigarettes. Cigarettes are
finger-sized rolls of paper with dried tobacco leaves inside. Cigarettes have different
types and flavors but among the most popular in the Philippines are the Reds, Lights, and
Menthols. It is proven that smoking is not healthy to any extent, it produces carbon
monoxide in the air that causes pollution and might cause second-hand smoking to that
people that inhales the said smoke. It is also proven to be addictive and a cause of a
weaker immune system. Smoking causes many physical disadvantages for the body such
as asthma, lung damage/cancer, weak immune system, enlargement of the heart, heart
attacks, and blocked blood vessels. Nicotine is amongst the proponents of a cigarette
stick that makes it addictive.

The profile of tobacco control in Asia varies notably from Thailand, Singapore,
and Hong Kong which have some of the world’s leading policies, to nations at the other
extreme such as the Philippines and Cambodia, which have a high smoking prevalence
and weak controls. The Philippines has long been an unrestricted operating environment
for tobacco companies, ripe for corruption and exploitation. Political cronyism was
endemic for decades, allowing companies to capitalise on their marketing freedoms to the
fullest potential in order to market their products to children younger than any segment
hitherto revealed in tobacco industry document research. Women, children, youth, and
the poor have been exploited over decades through countless marketing activities via
messages of hope, emancipation, sporting prowess, pop culture, and the emulation of
western affluence. ETS consultants were employed to defend the industry’s position and
maintain the social acceptability of smoking. Political influence enabled companies to
limit the effectiveness of bills relating to cigarette pack warnings, including tar and
nicotine levels. (Alechnowicz, K & Chapman, S)

According to a study conducted by Stanford University in 2017, a smoker's brain

becomes so used to feeling pleasure or reward from smoking that they become unable to
experience those positive emotions without nicotine. Worldwide, the tobacco industry
spends 8.37 billion dollars a year just to promote the product, keeping smokers smoking,
and producing more non-smokers to start smoking.

HealthJustice said the Philippines loses billions of pesos in terms of health and
economic costs from smoking. It cited a 2006 study by the WHO, Department of Health
(DOH), University of the Philippines-Manila and the Philippine College of Medical
Researchers Foundation showing that the government’s “economic costs, including
expenses for health care and costs of productivity losses,” reached P461 billion. The
group said price increases through tax reforms in tobacco products will discourage people
from smoking. It quoted a World Bank study as saying that a 10 percent increase in taxes
 on tobacco products would lead to a 4 to 8 percent decrease in consumption, thus leading
to saving thousands of lives. (P. Tubeza, 2019)

The Filipinos' preferred tobacco product is the cigarette. It is estimated that each
adult smoker consumes 838 cigarettes (42 packs) per year. There are 17.3 million
Filipino adult smokers (15 years old or older), 84 percent (14.6 milion) of which are
males and 16 percent (2.8 million) are females. 23 percent of the Filipino adults smokers
smoke daily. 38 percent of males averaged to smoke 11 cigarretes aday, and 6.9 percent
for females, who on the average smoked 7 cigarettes per day. 48 percent of the
population tried to quit, however, only 5 percent were successful.

In 2012, RA 10351 or the Sin Tax Law was passed, the Law aims to reduce
consumption of tobacco and alcoholic products and reduce diseases caused by the
mentioned products. The proposal to increase the tax rate of cigarettes to at least 3 pesos
per stick or 60- pesos per pack was certified urgent by President Duterte. This is the rate
that will allow the Philippines to achieve its Noncommunicable Disease (NCD) Target to
reduce smoking prevalence to 15% by 2022. Any rate lower than P60 will put an
unacceptable number of Filipinos at risk of dying to tobacco related diseases and will
result to 200,000 new smokers for ever year of delay in implementation. (doh.gov.ph).

In line with the aforementioned facts regarding the Tobacco industry of the
Philippines, entails corresponding micro and macroeconomic reactions and impacts
specifically with the signing of the Sin Tax Law. These said reactions and impacts will be
analyzed and measure through the Law of Diminishing Demand. The Law of
Diminishing Demand will be utilized as a theoretical foundation of the research. The
implication is that the Law of Diminishing Demand will determine whether the Sin Tax
Law is effective or not, by means of increases in government revenue, economic
progress, and reduced number of cigarette smokers in the Philippines.

1.2 The goal of the study is to determine if the Sin Tax Law has become effective since its
implementations and give a review to its effects to government revenue and the tobacco industry
for the maximum benefits of Filipinos. The study also aims to give concise, clear, and
understandable results that can provide awareness and information to the effects of cigarette
smoking to the health of Filipinos and economy of the Philippines. Finally, the study aims to be
used as a basis or assistance for future researches and advancements to the topic of tobacco, and
cigarettes and its economic implications to the Philippines.
1.3 Null Hypotheses
1. The Sin Tax Law has no positive implications to the Philippine economy
2. The Sin Tax Law doesn’t generate revenue for the Philippine government
3. The Sin Tax Law doesn’t reduce the growing percentage of cigarette smokers
 Section 2
Preliminary Review of Related Literature

This section presents the review of related literature and studies from different variables which
can further support the study.

2.1 Cigarette Facts

A cigarette is a mixture of organic and chemical compounds. The main material
are tobacco leaves mixed with several chemicals like methane, nicotine etc. Stanford University
made a comprehensive toolkit to prevent tobacco usage, it said:
Cigarettes are rolls of paper with dried tobacco leaves inside. They come in hundreds of
types, but the main forms are reds, lights, and menthols. There is no healthy way to
smoke. Two of the most harmful elements of smoke - carbon monoxide and tar - are
created by any kind of burning leaves, and can't be avoided. Even "lighter" and "natural"
cigarettes don't protect you from either addiction or poor health. Physically, smoking
causes asthma, lung damage, and lung cancer. It also causes hardening of the arteries,
stress to the heart, and eventually heart attacks and blocked blood vessels. Mentally, a
smoker's brain becomes so used to feeling pleasure or reward from smoking that they
become unable to experience those positive emotions without nicotine - they are
addicted. The nicotine you get from smoking is very addictive on its own. Cigarettes also
contain other drugs that make nicotine even stronger. To make things worse, the tobacco
industry spendes 8.37 billion dollars a year in marketing meant to keep smokers
smoking, and to get young people to start.
(Cigarettes are rolls of paper with … - med.stanford.edu. (n.d.). Retrieved from
https://med.stanford.edu/content/dam/sm/tobaccopreventiontoolkit/documents/tobacco/Ci
garette-Factsheet.pdf)
2.2 Health Implications of Smoking Cigarettes
Ten Filipinos die every hour from illnesses caused by smoking while the country loses
nearly P500 billion annually from healthcare costs and productivity losses, according to an anti-
tobacco group. HealthJustice Philippines disputed the claims of tobacco companies that
increasing taxes on tobacco would hurt tobacco farmers and lead to the loss of livelihood. “The
most important issue is none other than health. The World Health Organization (WHO) has
estimated that tobacco consumption kills 10 Filipinos every hour, due to cancer, stroke, lung and
heart diseases brought on by cigarette smoking,” the group said in a statement.
It cited a 2006 study by the WHO, Department of Health (DOH), University of the
Philippines-Manila and the Philippine College of Medical Researchers Foundation showing that
the government’s “economic costs, including expenses for health care and costs of productivity
losses,” reached P461 billion.
The group said price increases through tax reforms in tobacco products will discourage
people from smoking. It quoted a World Bank study as saying that a 10 percent increase in taxes
on tobacco products would lead to a 4 to 8 percent decrease in consumption, thus leading to
saving thousands of lives.

“A recent study by economists Filomeno Sta. Ana and Jo-Ann Latuja estimates that at
least 870,000 smokers will quit and 310,000 lives can be saved when the needed excise tax
reforms, which will significantly increase the price of cigarettes, are implemented,”
HealthJustice said. (Tubeza, P. C. (n.d.). Smoking kills 10 Filipinos every hour. Retrieved from
https://newsinfo.inquirer.net/61111/smoking-kills-10-filipinos-every-hour.)
2.3 Continuous Demand for Tobacco in the Philippines
The tobacco industry expects continued growth on sustained domestic and global demand
despite plans to raise the excise tax on tobacco products to discourage consumption and fund the
health sector. “While high excise tax rates had a big impact on production figures and livelihood
of our tobacco growers, this will not ‘kill’ the industry. As long as there is market demand for
quality tobacco, our farmers will still continue to produce tobacco,” Robert L. Seares,
Administrator of the National Tobacco Administration (NTA), told BusinessWorld in an e-mail
interview on Tuesday.

“In terms of profitability, tobacco production is not yet a sunset industry. While there is
still demand for quality tobacco in the global market, the agency is now focused on higher
volume of exports due to the quality of tobacco leaves, particularly Burley, that local farmers can
produce,” Mr. Seares said. Increased tobacco taxes are pending approval, under the
Comprehensive Tax Reform Package 2 and Senate Bills 1599 and 1605, which intend to fund the
public health sector.

The House Ways and Means Committee approved in principle the measure increasing
excise taxes on tobacco products by P2.50 annually until it reaches P45 in 2022, and by 4%
every year thereafter. Mr. Seares, despite saying that tobacco is not yet a sunset industry,
said higher excise taxes will adversely affect farmers. “Tobacco leaf production in the
Philippines has been reduced to only 48 million kilos in 2017 from 65 million kilos five years
earlier. Our five-year data (2013-2017) shows that the number of tobacco farmers and area
planted to tobacco plunged by 40% to 34,465, and 43% to 22,704 hectares, respectively,” Mr.
Seares said.

“Take note that excise tax rate has been going up since the passage of the Sin Tax
Reform Law in 2012, diminishing tobacco production figures. With another more to increase
tobacco sin tax, our tobacco growers are now faced with a more serious threat of losing their
primary source of income,” he added.

Demand for cigarettes has declined since the increase in tobacco taxes, according to a
study by Professor Myrna S. Austria and lecturer Jesson A. Pagaduan of De La Salle University
(DLSU). The study, “Assessing the Impact of the Philippine Sin Tax Reform Law on the
Demand for Cigarettes” found that “the decline in cigarette consumption by smokers contributed
more to the total effect of a cigarette price increase on demand than the decline in the number of
smokers.”

The study said demand for tobacco has decreased due to the increasing sin tax as well as
the existence of alternatives such as electronic cigarettes. It also found that the current tobacco
tax system is easier to administer and effective for the reduction of tax evasion as it imposes a
uniform tax rate, and manufacturers cannot misclassify brands or under-declare their products to
reduce taxes.
 NTA’s Mr. Seares said that raising tobacco excise tax is one of the most effective and
cost-effective measures to reduce consumption, and that it favors the health sector as 80% of the
incremental revenue will go to fund universal health care. “Increasing tobacco excise taxes is a
government measure to curb cigarette smoking for health reasons. The purpose really is to lower
sales of the product, by decreasing cigarette consumption by increasing the price, and lowering
demand for it,” Mr. Seares said.

Ariel T. Cayanan, Undersecretary of the Department of Agriculture, said that for as long
as tobacco remains legal in the country, farmers cannot be stopped from planting it.
“I think the name of the game, not just in agriculture, is your capability to earn. The moment you
lose, you can only survive for some time. The tobacco industry has been around for a long time,”
Mr. Cayanan said in an interview on Wednesday. (Ignacio, R. J. (n.d.). Tobacco industry still
sees demand despite rising taxes. Retrieved from https://www.bworldonline.com/tobacco-
industry-still-sees-demand-despite-rising-taxes/.)

2.4 Sin Tax Reform

Republic Act 10351, or the Sin Tax Reform Law, is one of the landmark legislations
under the Aquino Administration. It is primarily a health measure with revenue implications, but
more fundamentally, it is a good governance measure. The Sin Tax Law helps finance the
Universal Health Care program of the government, simplified the current excise tax system on
alcohol and tobacco products and fixed long standing structural weaknesses, and addresses
public health issues relating to alcohol and tobacco consumption.
(https://www.dof.gov.ph/index.php/advocacies/sin-tax-reform/)
2.4.1 Increasing Taxes will save lives
For the past months, the Department of Health and the Department of Finance, have been
actively advocating for increased taxes on tobacco products and alcoholic beverages to curb
consumption and ultimately reduce the incidents of illness caused by alcohol and tobacco. With
health partners from civil societies, we hope that these reforms pass into legislation before the
end of the 17th Congress.

The proposal to increase the tax rate of cigarettes to at least 3 pesos per stick or 60 pesos
per pack was certified urgent by President Duterte. This is the rate that will allow the Philippines
to achieve its Noncommunicable Disease (NCD) Target to reduce smoking prevalence to 15% by
2022. Any rate lower than PhP 60.00 will put an unacceptable number of Filipinos at risk of
dying to tobacco related diseases and will result to 200,000 new smokers for every year of delay
in implementation.

“The Department of Health would like to emphasize, that Sin Taxes are first and
foremost, a health measure that will discourage Filipinos to smoke and excessively consume
alcohol. As global evidence suggests, taxation is the single, most cost-effective measure to
safeguard the public from the harms of tobacco and alcohol use and their accompanying societal
costs”, Secretary Francisco Duque III said.

A secondary benefit of such legislation is making funds available for programs that
benefit the underserved. RA 10351 or the Sin Tax Law of 2012 earmarked 85% of revenues to
health and 15% to tobacco producing regions. Based on the latest projections, the UHC Act will
require a total of 257 billion in the first year only, assuming reforms are spread out over a 10-
year period. The lack of sufficient and sustained funding will hamper the full implementation of
the UHC Law. Moreover, shortening the reform period to deliver benefits to the Filipino people
sooner, will require funds to be generated immediately. “Sin tax saves lives, promotes
inclusiveness, and is a protective health policy reform that will enable us to build a healthier
nation. I am grateful to our colleagues at the Department of Finance, our health partners, and our
champion legislators for upholding this cause with us. We very much hope for the passage of this
legislation, especially now that the UHC Act has been signed into law.” The Secretary of Health
is positive that the resulting policy decision puts primacy to health, above anything else.
(https://www.doh.gov.ph/node/16806)
2.5 Philippine Tobacco Export
Exports of quality-grade Philippine tobacco have resuscitated the barely surviving
industry that has been hit hard by the government's Tax Refr for Acceleration and Inclusion
(TRAIN) law, which was tasked to fund the country's universal health care program. "We are not
a sunset industry because we have a lot of orders from other countries," administrator Robert
Seares of the National Tobacco Administration told the crowd at the Miss Virginia Tobacco
Festival 2019 held recently in Candon City. He nevertheless admitted that government's decision
to impose higher excise tax is the problem of the tobacco industry. “We will appeal to lawmakers
not to use our tobacco funds for the universal health care,” he added.

“We used to produce 65 million kilos of tobacco leaves per year, but now it is only 40
million kilos,” he lamented. The tobacco industry in northern Luzon is feeling the crunch borne
out of the national government’s imposition of the TRAIN law, but administration lawmakers
still believe it is not a dying industry. “The demand has dropped significantly that we even had to
teach our farmers how to plant other agricultural products. They plant palay during rainy season
and plant corn and tobacco during summer,” said Ilocos Sur Rep. Eric Singson.

According to the lawmaker, their usual production of 50 million kilos of tobacco leaves
per annum has dwindled by half, and withdrawals of taxed cigarettes in the Bureau of Internal
Revenue also had a slump of about 30 percent. “We don’t want the industry to die,” Singson
said, noting that high-grade tobacco now costs P90 per kilo while low-grade costs half the price,
and a kilo of corn is only pegged between P12 to P14.

“But we’re not losing hope, we just have to be able to strike a balance. We also
understand that government needs to raise funds for its Build, Build, Build projects and finance
the universal health care as well. We’ll just have to bear it, there’s nothing we can do,” he added.
The TRAIN law (Republic Act 10963) is the initial package of the Comprehensive Tax Reform
Program of President Duterte, where funds sourced from taxing cigarettes will be used to finance
the country’s Universal Health Care program for all Filipinos. “This may mean less profit, but
we will see to it that we will continue to help the tobacco farmers of Ilocandia,” Singson said.
(Porcalla, D. (2019, March 30). 'Tobacco exports keeping industry alive'. Retrieved from
https://www.philstar.com/headlines/2019/03/31/1905987/tobacco-exports-keeping-industry-
alive.)
 Section 3

The Theoretical and Conceptual Framework

This section would determine the independent variable and dependent variable in relation
to how the sin tax law affects the government revenue and tobacco industry.

The proposal to increase the tax rate of cigarettes to at least 3 pesos per stick or 60 pesos
per pack was certified urgent by President Duterte. This is the rate that will allow the Philippines
to achieve its Noncommunicable Disease (NCD) Target to reduce smoking prevalence to 15% by
2022. Any rate lower than PhP 60.00 will put an unacceptable number of Filipinos at risk of
dying to tobacco related diseases and will result to 200,000 new smokers for every year of delay
in implementation.

A secondary benefit of such legislation is making funds available for programs that benefit the
underserved. RA 10351 or the Sin Tax Law of 2012 earmarked 85% of revenues to health and
15% to tobacco producing regions. Based on the latest projections, the UHC Act will require a
total of 257 billion in the first year only, assuming reforms are spread out over a 10-year period.
The lack of sufficient and sustained funding will hamper the full implementation of the UHC
Law. Moreover, shortening the reform period to deliver benefits to the Filipino people sooner,
will require funds to be generated immediately.
 The conceptual framework starts from the Government being the entity responsible for
the laws, regulations and ordinances that may affect the cycle. The Sin Tax Law is the
Independent variable being the basis of the change in demand and price. Since it aims to reduce
the number of cigarette intake of Filipinos, the higher tax added to tobacco products, the higher
the possibility of reducing cigarettes taken.

There are two variables being dependent to the Sin Tax Law. First, the revenue of the
tobacco industry and second is the revenue of the government. Both are dependent on how much
percentage the Sin Tax Law brings to the tobacco industry; the tobacco industry will lose billions
of profit while the law will generate revenue for the government.

Republic Act 10351, or the Sin Tax Reform Law, is one of the landmark legislations
under the Aquino Administration. It is primarily a health measure with revenue implications, but
more fundamentally, it is a good governance measure. The Sin Tax Law helps finance the
Universal Health Care program of the government, simplified the current excise tax system on
alcohol and tobacco products and fixed long standing structural weaknesses, and addresses
public health issues relating to alcohol and tobacco consumption.

According to the law of demand, a certain percentage increase in the price of a good will
result to a decrease to its demand. The decrease to the demand of cigarettes will have an effect to
the tobacco industry, thus, reducing its revenue and profit.

The Sin Tax Law also affects the Government Revenue since 85% of the total revenue
produced by the law becomes an asset of the government and is distributed to the health industry.
15% of the government revenue from Sin Tax Law is given to the tobacco industry as
compensation.
 Having higher price means lower demand but the government made sure that the tobacco
industry will still have profit. This means that the Tobacco industry, given that its still generating
revenue from its consumers, will still pay its tax to the government.

The diagram will help the audience understand the chain effects of the Sin Tax law. It is
important because it supplies a comprehensive and understandable illustration on how the Sin
Tax Law affects both the Tobacco Industry, Government Revenue, and its chain effect to both.
 Section 4
Conclusion

The theoretical and conceptual framework is important to understand the positive and
negative effects of the Sin Tax Law to the Cigarette Industry, Government, and Health Industry.
Through the conceptual framework, the public can have a comprehensive understanding on how
can the implied percentage tax of the law have an impact not only to cigarette consumers and the
tobacco industry but also to the health and economy of the country as a whole. The concept
paper tells whether the Government or the said law has been successful to its classified goal. By
this paper, readers can have arguments to whether the effects of the law are still efficient to the
public or not and whether the government should adjust, revise, or promulgate new implications
to the said issue.

The researcher recommends that future researches that will use the concept paper take
note of the of the following:
1. Employment that the Tobacco Industry Produces
2. Research to which of the diseases mentioned by the DOH are really produced by
smoking alone, or what is smoking’s contribution to such diseases.
3. Inclusion of newly publicized laws that are related to taxation of tobacco related
products.
4. Effects Sin Tax and other newly promulgated laws to the Small, Medium Enterprises
and the Underground economy of cigarettes.