One of the major propellers of modern-day Philippine tax reforms is Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, signed by then President Duterte in December 2017 and taking effect on January 1, 2018. TRAIN Law’s promises and objectives were multifaceted. Under the law, excise taxes were increased on automobiles, tobacco, and petroleum products to push for a sustainable future. Sweetened beverages were also slapped with excise taxes to combat diseases and health concerns stemming from excessive consumption. Further, personal income tax brackets were revamped by removing the personal exclusions and lowering the graduated income tax rates—a radical change in 20 years. Revenues generated from TRAIN were used to fund big-ticket infrastructure projects and social programs such as unconditional cash transfers to those below the poverty line.
Since the enactment of the law over six years ago, a global pandemic has emerged, prices of basic goods and services have risen in an inflationary economy, war has loomed over conflicting countries, and markets all over the world have experienced recession. Over six years have passed, and Filipinos have been on board the TRAIN ride. What has the effect been on the average Filipino as regards the lowering of personal income tax rates and the increase in excise taxes on fuels and sweetened beverages?
First station: A higher disposable income by lowering personal income tax rates?
Prior to TRAIN, individual income tax rates were set between 5% and 32% based on a graduated income table ranging from P10,000 to P500,000. Computing for individual income tax back then also included accounting for the number of dependents of individuals, which was at a maximum of P100,000 per individual. Under TRAIN, individual income taxes have been homogenized regardless of the individual’s civil status or number of dependents. With this, the individual income table was upped between P250,000 and P8 million, while the graduated income tax rates have been changed to range between 0% and 35%, with changes in basic tax rates in two tranches—the first one in 2018 and the second in 2023. Mixed-income earners also get the option to pay taxes at 8% per year in lieu of the graduated income tax rates and business taxes under the new law, subject to certain conditions.
TRAIN increased the take-home pay for individuals and was touted as a progressive method of reducing income taxes for lower-income earners while increasing taxes for higher-income earners. With the higher disposable income for most individuals, it was predicted that demand for goods and services would increase since people would now have more money to spend. On the other hand, this new tax regime is meant for easier tax collection and revenue generation on the part of tax collectors.
A 2022 study by Feniz et al. for the Journal of Economics, Finance, and Accounting Studies stated that TRAIN has brought about a positive impact related to people’s increased buying power due to the increase in disposable income. The study even went on to say that the higher disposal income may increase the potential savings of Filipinos, but they were unable to do so since the money intended for savings has been spent to buffer increased household costs. The TRAIN Law had undesirable effects related to a stable and even worse living situation since the increase in income was countered by the increase in prices of goods and services. As such, the gains earned from TRAIN have been offset by higher monthly expenses.
Further, an August 2019 analysis made by Rappler has shown that the added excise taxes may have a negative impact on minimum wage earners (MWEs) and those in the informal sector. Since MWEs are not taxed in the first place, the added excise taxes will deplete their disposable incomes even more.
While it is true that the TRAIN Law provided for a higher disposable income for individuals, the same was also offset by the rising prices of goods and services.
Second station: Marking the effects of added excise tax on fuels
TRAIN Law also included added excise taxes on petroleum products, such as an increase to P2.50-P6.00 per liter of diesel fuel (previously excise tax-free) and an increase to P7.00-P10.00 per liter for gasoline (previously at P4.35 per liter). The intended effect of these excise taxes is to promote more sustainable and environmentally friendly ways of mobilizing, such that people may opt to commute.
We should remember, however, that fuel and coal are used for commuting and for many other uses in our everyday lives. According to London-based think tank Ember, the Philippines’ annual coal share for power generation in 2023 was at 61.9%, higher than the 59.1% recorded in 2022. An October 2019 simulation by Castillo et al., published by the Philippine Institute of Development Studies (PIDS), has earlier cited that poverty incidence increased when the prices of goods and services also increased due to the increase in excise tax on fuels, with the farming sector being affected the most. Further, the simulation also showed that the excise tax on fuels has contributed to a fall in employment, with the agricultural and industrial sectors being the most affected due to lower economic activity.
In 2022, the country also saw its highest spike in fuel prices, with diesel prices peaking at P84 per liter, which continued to ripple in 2023. Fuel price watchdogs and stakeholders have since requested the administration suspend the excise tax on fuels. Under Revenue Regulations No. 2-2018, the government has the power to suspend the scheduled increase in excise taxes when the Dubai crude oil reaches or exceeds USD 80.00 per barrel. To no avail, however, the Department of Finance has not pushed through with a suspension of excise tax hikes, as it was estimated to result in P41.4 billion in excise taxes needed for social programs and infrastructure.
Since we are still largely dependent on coal, excise tax thereon would still be considered a big contributor to our spending. Consequently, the excise tax on fuels may have a continued impact on poverty incidence, unemployment, and inflation.
Third station: What’s the taste of sugar taxes?
The TRAIN Law also slapped an excise tax on sweetened beverages. From what was previously tax-free, a liter of beverage using caloric and non-caloric sweeteners may cost individuals at least an added P6.00, while beverages containing high fructose corn syrup will cost at least P12.00 more. According to the World Bank, taxes on sweetened beverages may incentivize individuals and businesses alike to manufacture and consume more health-conscious products.
This was proven by simulation in a February 2019 study conducted by Saxena et al. for the US National Library of Medicine (NLIM). According to the simulation, the excise tax on beverages could avert 913 deaths related to diabetes, 10,339 deaths from ischemic heart disease, and 7,950 deaths from stroke over 20 years and could potentially help the government save an estimated P31.6 billion in estimated healthcare costs. However, a separate 2019 study conducted by Onagan et al. still published at the US NLIM, found that average prices of sweetened beverages increased by 16.6% in supermarkets, with carbonated non-alcoholic drinks having the highest spike at 21% during the first year of TRAIN’s implementation. To maintain sales, manufacturers have enhanced marketing measures and packaged product variants in small portions.
Ideally, when prices of goods increase, the demand for them decreases; such was the intended effect of the sugar tax. Recently, however, no less than the Congressional Policy and Budget Research Department of the House of Representatives has stated that this intended effect was not exactly met, citing that the consumption growth rate of these products was registered at 4.2% during the pandemic, a higher growth rate of 4.4% recorded in 2023. The committee later went on to state that it is highly possible that the health benefits intended by this sugar tax were only good for the short term.
In a country where sari-sari stores and ambulant food vendors never run out of sweetened beverages such as sodas and juices, raising excise taxes therefrom may contribute to a healthier Filipino. However, while sugary drinks have increased in price due to an increase in excise taxes, manufacturers have sold them in more affordable, albeit smaller, packaging, and consumers continue to demand these products, especially when they are more affordable than healthier options.
Where is this TRAIN heading?
The intentions of the legislature for the implementation of the TRAIN Law have been promising. It provided for progressive taxes for individuals; any collection therefrom, especially from new or added taxes introduced, would boost infrastructure projects and social programs, not to mention the intended effects of taxes on automobiles and tobacco that were not mentioned in this article. Nonetheless, it is important for legislators and stakeholders alike to be in constant dialogue to discuss and revisit whether the intended effects have been met.
During these discussions, several questions may arise, such as:
How can we counter the inflationary impacts of rising fuel prices and goods when consumers are supposedly receiving more disposable income? The answer may not be purely coming from a fiscal perspective but may need the government’s intervention to counter inflation—raising minimum wages, raising interest rates to curb consumer spending, and price controls have been implemented in recent times. Nonetheless, inflation continues to persist. In which case, social amelioration programs may be revisited to make them more inclusive of those greatly affected by inflation.
If fuel prices are so high, how about trying to commute? This may be easy to say, but difficult to do. In most cities, public transportation has been difficult, especially with recent moves by the government to abolish traditional jeepney rides and train rides, which are difficult to catch, especially during rush hours. The answer may lie in providing more incentives to businesses and employers planning to set up in the countryside, a move introduced by the Corporate Recovery and Tax Incentives for Enterprises Law, whose effects we are yet to see. Moreover, if high fuel prices are continuing to haunt us, it is probably time to push for more sustainable and low-cost initiatives to power generation and consumption.
If sugary drinks are expensive, how about trying the healthier options? Again, easy to say, difficult to do. Since healthier food and drink options are only affordable to the middle class at the very least, this leaves low-income earners with little to no option but to buy what is accessible to them, most of which are unhealthy and low-cost. We may also need to revisit subsidizing healthy food and beverage products for those who need them, rather than giving them cash alone.
In recent years, we have seen more discourse on tax reforms, but only particularly among corporate and institutional taxpayers. Ultimately, it is impossible to discuss the effects of tax legislation without considering the economic impact on individuals. All of us citizens have no choice but to ride on TRAIN, yet it is also equally important to inform the train conductors—our legislators and leaders—where we wish to be headed: are we aligned on the same goals of making taxes more equitable for citizens and government, and are we alighting on the same place of inclusive economic empowerment?
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 27 August 2024
