Industry groups, economists push for tobacco excise tax rationalization to combat illicit trade

Industry groups are urging the government to rationalize the excise tax system, warning that the current structure is fueling the illicit trade of cigarettes and alternative products, jeopardizing government finances and public health.

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They said the existing tax framework is misaligned with market behavior, penalizing legitimate businesses and rewarding smugglers. As a result, excise revenues have stagnated, while the illicit trade in both cigarettes and vapor products is escalating.

Economists said the Philippines has passed the revenue-maximizing point on the Laffer Curve, where higher taxes reduce revenue.

Dr. Arthur Laffer said that applying the Laffer Curve shows that excessive tax rate increases can decrease revenue by incentivizing tax evasion and the growth of the illicit market, suggesting that the Philippine tobacco excise tax rate has reached a “prohibitive range.”

Excessively high taxes act as a de facto prohibition, pushing consumers to cheaper, illegal alternatives, undermining public health goals and harming legitimate businesses.

Bureau of Internal Revenue (BIR) data show that 2023 tobacco excise tax collections reached only P134 billion, or nearly P51 billion below target. Despite higher taxes, revenue is declining as legal sales plummet, primarily due to consumers shifting to untaxed illicit products rather than quitting.