The Marcos administration is currently facing a daunting challenge: unwinding the fiscal deficit resulting from the heavy borrowing during the pandemic and investing in crucial social programs. It also faces the challenge of building on and implementing the good reforms from previous administrations.
Unfortunately, recent policy decisions have diluted past reforms and neglected the most binding constraints to development.
One key reform that was recently reversed is the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act of 2021, or Republic Act No. 11534. On Nov. 11, President Ferdinand “Bongbong” Marcos, Jr. signed into law Republic Act No. 12066, or the CREATE MORE (Maximize Opportunities for Reinvigorating the Economy) Act. CREATE MORE widens the coverage and scope of fiscal incentives for firms, which will result in revenue erosion, and reverses the crucial governance reforms from the CREATE Act that made our incentive system targeted, time-bound, and performance-based.
Public health policy has also seen significant backsliding: one of the first bills that lapsed into law under the Marcos Jr. administration was RA 11900, widely known as the Vape Bill, which positioned itself as a regulatory measure for e-cigarettes and heated tobacco products, but instead widened access to these harmful products to the youth. RA 11900 was a huge step back for tobacco control.
Earlier this year, House Ways and Means Chair Representative Joey Salceda filed House Bill (HB) No. 9866, formally known as An Act Establishing a Regulatory Regime for Electronic Cigarette Manufacturing and for Other Purposes. The House Committee on Trade and Industry will conduct an initial deliberation on this bill today.
House Bill 9866 promotes, enhances, and boosts the growth of the e-cigarette manufacturing industry in the country by offering generous fiscal incentives such as value-added tax (VAT) and duty exemption on the importation of manufacturing equipment.
The harm of this proposed legislation is two-fold; it is a threat to both public health and fiscal health.
E-cigarettes or vapes are products that have been scientifically proven to cause widespread harm. While e-cigarettes are marketed as cigarette smoking cessation devices, these products contain substantial amounts of nicotine and other harmful chemicals and introduce the risk of addiction, especially to young non-smokers. Evidence on e-cigarette or vaping-associated lung injury (EVALI) is also continuously growing across the globe.
Incentivizing the growth of the e-cigarette industry is an unsound, irresponsible, and outrageous policy decision, the cost of which will be borne by our already burdened public health system. Signaling that the Philippine government is supportive of the e-cigarette industry by providing incentives for e-cigarettes, which have already been established as products harmful to human health, will tarnish our global reputation. In the United Kingdom, a ban on disposable e-cigarettes will be implemented by 2025 due to widespread use by children.
Further, we have to be strategic and rigorous in the granting of incentives. The CREATE Act of 2021 mandated that our priorities for fiscal incentives are “enterprises crucial to national development” — which, putting it lightly, cannot be said about our e-cigarette or vape industry.
Offering fiscal incentives for the e-cigarette industry also lightens manufacturers’ tax burden, going against the very purpose of tobacco taxes. Should HB 9866 be passed, the government will be losing even more crucial revenues in a time of shrinking fiscal space and lower excise tax collections. This, in turn, will lead to even smaller budgets for development and public health programs.
In HB 9866’s explanatory note, Mr. Salceda points to the substitution effect of higher taxes on conventional cigarettes as the cause of consumption pattern shifts, the rise of smuggling of e-cigarettes, and safety concerns surrounding the e-cigarettes that enter the Philippines. Clearly, all these factors pertain to the Philippine domestic market.
Here is the disconnect: How does giving fiscal incentives for the production of e-cigarettes intended for export solve issues like substitution, illicit tobacco trade, and safety in the Philippine market? It does not. The assumption that these issues will be addressed by granting incentives to manufacturers of export-oriented e-cigarettes is flawed, given that the e-cigarette industry is one that has been proven to cause direct harm to human health.
Traditional cigarettes and e-cigarettes alike are subject to heavy taxation precisely because they are harmful. This bill is a poorly disguised attempt to lighten the tax burden on such products.
Rather than arbitrarily awarding the e-cigarette industry with undeserved fiscal incentives, the government should instead focus on strengthening tax administration efforts, improving agencies’ capacity to enforce tobacco control policies, implementing stricter advertising and promotion regulations, and raising taxes further on excisable products, especially on e-cigarette and vape products which are primarily consumed by the vulnerable youth.
In fact, in May this year, it was Mr. Salceda himself who filed a measure to curb illicit tobacco trade, House Bill 10329. The filed bill was supported by health advocates for enhancing local coordination and establishing a comprehensive track and trace system to prevent the proliferation of illicit tobacco products, including e-cigarettes. HB 10329’s core provisions will go far in addressing the issues Mr. Salceda claims to be the rationale behind HB 9866.
We hope the Committee on Trade and Industry sees HB 9866 for what it is: a real threat to the Philippines’ global reputation, not only in the sphere of public health and tobacco control, but also in industrial policy.
Therese Hipol and Pia Rodrigo are researchers on Action for Economic Reforms’ fiscal and health policy team.