Proposed higher excise taxes likely to further stall consumer spending

By Katherine K. Chan, Reporter

THE PHILIPPINES’ already subdued consumer spending could come under further pressure if the government pushes through with plans to hike taxes on sugary drinks, e-cigarettes and alcohol, despite the expected income tax relief, analysts said.   

Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, said while higher excise taxes could provide some fiscal relief, it could also dampen household spending.

“Raising excise taxes improves fiscal sustainability and creates room to finance public services and infrastructure,” he told BusinessWorld via Facebook Messenger. “However, if implemented when consumer demand is already weakening, those taxes can reduce household spending in the short run.” 

The levies’ impact, according to Mr. Peña-Reyes, would depend on the coverage of the tax reform package proposed by the Department of Finance (DoF).

“Yes, it could dampen consumption, but the magnitude depends on which goods are taxed, how large the tax increase is, and whether income tax relief reaches the same households that bear the higher excise taxes,” he said.

In the second quarter, household final consumption expenditure — a key driver of the economy — grew by 2.8% in the second quarter, further slowing from the 5.2% print in the same quarter last year and 3% in the previous quarter.

This was the weakest pace since the 4.8% contraction in the first quarter of 2021. Excluding the pandemic, this was the slowest growth in consumption since 2.6% in the third quarter of 2010.

This could weaken even further if the government raises excise taxes, Foundation for Economic Freedom President Calixto V. Chikiamco said.    

“Yes, increased excise tax may dampen consumption growth more, which had become anemic since the Middle East crisis,” he told BusinessWorld in a Viber message. 

“Higher inflation is already a tax on income earners,” he added. “Higher excise taxes risk slower consumption and growth. Of course, the increased excise taxes are targeted to vice products and demand elasticity will determine how much consumption will decrease due to the increased excise taxes.” 

On Monday, the DoF unveiled tax reforms under the proposed Promoting Growth, Revenue, and Equity towards Socio-economic Sustainability (ProGRESS) bill.

The measure covers new or higher taxes on sweetened beverages, e-cigarettes, flexible plastic products, luxury vehicles and private aircraft, and is projected to generate an average revenue of P129.68 billion annually from 2027 to 2030.   

According to the DoF, this could offset the estimated P81.73-billion annual foregone revenue from raising the threshold for income tax exemptions to P350,000 from P250,000 for low- and middle-income earners and the tax exemptions for micro, small, and medium enterprises.   

Filomeno S. Sta Ana, III, coordinator of the Action for Economic Reforms, noted that expected losses from the proposed tax breaks likely forced fiscal authorities to look for new revenue streams.   

“The administration has no choice but to find new sources of revenues. Not only to compensate for the revenue losses from increased income tax relief but also to prevent a fiscal crisis amid a deteriorating fiscal situation. So, the will (to impose new taxes) should be there,” he said via Viber.   

If the ProGRESS bill is enacted, the excise tax on beverages using caloric or noncaloric sweeteners would more than triple to P20 per liter from P6, while the levy on beverages using high-fructose corn syrup would climb to P40 per liter from P12. 

The DoF also seeks to expand the excise tax coverage to edible ices, including ice cream, sorbets, ice lollies and frozen yogurt.   

It likewise wants to impose by 2027 a unified P72.93 excise tax rate per milliliter of salt nicotine, per two milliliters of freebase nicotine and per pack of 20 heated tobacco products.

For distilled spirits, the excise tax could rise to P157.21 per proof liter, with the DoF proposing to tax premixed alcoholic beverages or alcopops as well.   

The DoF also plans to impose a P150-per-kilogram excise tax on sando bags, labo bags, and sachets. It also wants to increase the excise taxes on automobiles and nonessential goods, including private aircraft, with a 75% tax rate on vehicles with a net manufacturer’s or importer’s price exceeding P8 million.

“We note that this excise tax reform package is a bundle of potentially unpopular and favorable tax adjustments,” University of Asia and the Pacific Economist Marco Antonio C. Agonia told BusinessWorld in an e-mail.

“While many may view higher taxes on sweetened beverages, plastics, and e-cigarettes unfavorably, similarly higher taxes on discretionary items such as luxury cars and private aircraft may be more palatable to many Filipinos, along with the increase in the income tax exemption threshold,” he added.   

‘DOUBLE WIN’
Meanwhile, Mr. Sta. Ana dubbed the proposed excise taxes as a “double win” for the country, as it could discourage the use of harmful products while also boosting the government’s revenues.   

“(T)he excise taxes on these products benefit health. Thus, one goal is precisely to discourage consumption of such unhealthy products,” he said. “But at the same time the taxes generate revenues. A double win.”

Despite the new and updated excise taxes, Mr. Agonia hinted that consumption will still likely hold as consumers resort to alternatives for the affected products, especially with additional budget from the income tax relief.

“This income tax relief may still have a net positive effect on consumption. With BSP’s estimated household marginal propensity to consume being close to 1.0, that implies that most of every additional peso of income for households gets spent back into the consumer economy,” he said.   

“Recipients of the annual income tax-exempt threshold will likely spend their additional income to purchase goods and services. Furthermore, additional prices for sugary drinks and plastics may simply encourage consumers to substitute for other goods,” Mr. Agonia added.   

He also noted that individuals falling under the P350,000 annual income bracket are unlikely to be affected by the higher levies on luxury vehicles and personal aircraft.   

For Mr. Peña-Reyes, on the other hand, keeping the expanded excise tax package targeted to sin products could limit its impact on consumer spending.

Meanwhile, Coca-Cola Europacific Aboitiz Philippines, the country’s Coca-Cola bottler and distributor, said it is reviewing the proposed changes to the excise tax on sugar-sweetened beverages.

“At this time, we are in the process of gathering and reviewing all available information to fully understand the potential implications,” the company told BusinessWorld in an e-mailed reply to questions.

“Generally, any increase in taxes on food and beverage products has the potential to affect consumers, retailers, and small businesses across the value chain. Our focus remains on continuing to provide Filipinos with a range of beverages choices while supporting affordability and accessibility for consumers,” it said. — with Alexandria Grace C. Magno