Calling a spade
Business World, 10 October 2012


Two quotes — more than two thousand five hundred years apart — came to mind with the release of the Recto Report, which is my shorthand for the report of the Senate ways and means committee, chaired by Ralph Recto, on the sin tax bill.

The first is “The mountain labored, and gave birth to a mouse,” which comes from one of Aesop’s fables (The Mountain in Labour) from Classical times; and the other is: “We’re not going to let our campaign be dictated by fact-checkers,” which is a statement attributed to the Republicans in the current US presidential campaign.

The quotes are really self-explanatory. But the explanation will be enriched by specific details. As far as the mountain-mouse quote is concerned, let’s give some background by recalling that the House version of the bill started off with seven separate versions (in the first half of 2011), and culminated in what has been called the Abaya bill (Abaya is now the new DoTC secretary). Meanwhile, in the Senate, separate bills were filed by Ping Lacson and Miriam Santiago. And let us not forget that the Departments of Health and Finance are very much in the picture.

Where does Recto come in? Well of course he chairs the ways and means committee, which conducted four very much publicized, televised and SRO hearings with the health lobbyists and finance lobbyists squared off against the tobacco lobbyists (the tobacco manufacturing firms and, what is really sad, the National Tobacco Administration).

Presentations were made. Studies were submitted (by the health and finance people — I am not aware of any study presented by the tobacco lobby, although I may be wrong). The studies of the latter showed unambiguously that the higher the sin taxes, the greater the additional revenues to the government (it was shown that the demand for tobacco products is price inelastic), although consumption would be reduced (and therefore, the greater the health benefits). The health and finance lobby even showed that the tobacco industry as a whole would not suffer financial losses.

The tobacco lobby claimed that tobacco farmers would be hurt, that the tobacco control campaign in Thailand was a failure (citing a newspaper report in that country); that 2.7 million Filipinos would be disadvantaged by the proposed increases in sin taxes; that the government might even lose revenue because of the increased smuggling that would take place.

I attended the last of those hearings, by the way, where Recto was all graciousness, and Franklin Drilon seemed to be at his sharpest, wanting to obtain data from the local Philip Morris that would allow a determination of whether the transactions between the local company and its mother company were at the required arms length (the Department of Finance pointed out certain discrepancies that raised suspicions).

Recto asked all parties to submit any additional studies, findings, data, analyses that would etc., guide the ways and means committee in making its report. And certainly, the health and finance lobby complied. For example, the Thailand-based South East Asia Tobacco Control Alliance (SEATCA) sent a letter to Recto (adding to the studies of the Action for Economic Reform), to “correct some of the inaccuracies and misinformation contained in the presentations and statements of the Philippine Tobacco Institute, Philip Morris Fortune Tobacco, and Japan Tobacco International.” The SEATCA, using a “more complete evidence-based picture,” demonstrates that “the tobacco industry cannot be trusted,” and presents meticulously the evidence that proves its point.

And what came out of all of this? In a nutshell, Recto’s report recommends a sin tax schedule that will raise essentially half of the amount which the House of Representatives version targeted — which in turn was already about half of what the Finance Department wanted. That’s the mouse that the mountain produced.

In the process, per the analysis done by the health and finance lobby, it looks like the Recto solution, a seemingly impressive system of price cutoffs adjusted to inflation combined with a three-tiered system, will actually enable cigarettes to remain cheap, or become cheaper over time, with Marlboro and Philip Morris cigarettes possibly downgraded to medium-priced category in the near future (2015), and to low-priced category by 2020. The mouse is a tobacco-colored one, more specifically, a Philip Morris Fortune Tobacco colored one.

Which means, of course, according to the analysts, that Filipino cigarettes will remain one of the cheapest in the world, with no end in sight to the deaths and disabilities that smoking results in.

The government loses, the Filipinos lose, Recto and the tobacco industry win.

As for the second quote, it has to be clear that Recto did not let his report be dictated to by fact checkers. Example: contrary to the claim of the local tobacco lobby, the Thai experience with tobacco control (in data presented to Recto by the SEATCA) has been successful. Thailand switched from a three-tier tax structure to a unitary tax structure in 1990. Excise taxes were increased TEN times since then: from 55% in 1990 to 60% in 1994, to 62% in 1995, to 68% in 1996, to 70% in 1999, to 71.5% in 2000, to 75% in 2001, to 79% in 2006, to 80% in 2007, to 85% in 2009,and 87% this year. The ratio of total tax to Retail Price of cigarettes now averages 70% (ours: 41%).

What happened to the smoking in Thailand as a result? Smoking prevalence decreased from 32% (males 59.3%, females 4.9%) in 1991, to 21.4% (male, 40.7%, female, 2.1%) in 2011.

And finally what happened to revenues? They increased from THB15.5 billion in 1990 to THB57.2 billion in 2011 — or by a factor of 3.7 times.

And just for the record, a study by economists headed by Stella Quimbo, using Philippine data, show essentially the same thing: increased revenues, decreased consumption, as well as the impact on health outcomes.

All ignored by Recto. No wonder his report is now being called the Philip Recto report or the Ralph Morris report. Take your pick.

I cannot resist ending with a series of quotes, this time from tobacco industry documents describing the Philippines (circa Marcos): From Philip Morris — “corruption, bribery, smuggling and dirty politics are worse than anywhere else.” From Lorillard — “again government has postponed the announced tax increase… the government has been bought off twice.” And from British American Tobacco — through “unfair and discriminating laws to favor Fortune (Tobacco),” Lucio Tan (it asserts) was able to command the highest cigarette market share in the Philippines for many years.

History repeating itself?