AMERICAN economist Arthur Laffer said the Philippines’ successive increases in tobacco excise taxes may have reached a point where higher tax rates are reducing government revenues while encouraging the growth of the illicit cigarette market.
Laffer, founder and chairman of Laffer Associates and the economist behind the “Laffer Curve” theory, said Philippine data suggest that continued tax increases have become counterproductive.
“The data strongly suggest that the Philippines has gone too far in increasing tobacco tax rates. If you overtax a product, you lose control of the market, you lose revenues, and you have more people buying illicit cigarettes,” Laffer said.
The Laffer Curve illustrates the relationship between tax rates and government revenue, arguing that beyond a certain point, higher taxes can lead to lower tax collections by discouraging legal economic activity or encouraging tax avoidance.
The Philippines saw tobacco excise tax collections rise following the passage of the Sin Tax Reform Law of 2012, the Tax Reform for Acceleration and Inclusion (Train) Law of 2017, and the Tobacco Tax Law of 2019. The laws imposed annual increases of P5 per cigarette pack from 2017 to 2023, followed by a permanent 5-percent annual increase beginning in 2024.
Government data showed tobacco excise tax revenues climbed from P126 billion in 2017 to a record P176 billion in 2021. Collections, however, declined in the succeeding years to P160 billion in 2022, P135 billion in 2023, and P134 billion in 2024 despite continued tax increases.
Laffer said the trend reflects the effects described by the Laffer Curve, where excessive taxation eventually reduces revenue instead of increasing it.
He also cited a study by the University of Asia and the Pacific (UA&P), which found that the implementation of tobacco tax laws coincided with the expansion of the illicit cigarette market, with unregistered and counterfeit brands maintaining double-digit market shares for more than a decade.
The study estimated that illicit cigarette trade resulted in P22 billion in foregone tax revenues and P84 billion in lost product value. It also estimated broader economic losses in 2022, including P118.4 billion in output, P115.5 billion in value added, P49.7 billion in household income, and more than 210,000 jobs.
Laffer said similar trends had been observed in Ireland and Singapore.
He said Ireland increased tobacco excise taxes by 107 percent between 2000 and 2009, causing cigarette prices to rise by 29 percent. During the same period, tobacco tax revenues fell by 33 percent while illicit cigarette consumption grew to nearly a quarter of the market. Ireland eventually stopped raising tobacco excise taxes after 2009.
In Singapore, tobacco excise taxes increased by 125 percent between 2000 and 2005, with cigarette prices rising 67 percent. While revenues initially increased, collections later declined as illicit cigarette seizures rose, prompting the government to suspend further excise tax increases from 2005 to 2013, he said.
Laffer urged the Philippine government to adopt a data-driven approach to tobacco taxation that balances revenue generation with public health objectives.
“The Philippine government should adopt data-driven taxation policies that strike a balance between fiscal sustainability and public health goals. Find that sweet spot where you have just the right taxation, you discourage as many smokers as possible without losing them to illicit tobacco, and you collect revenues to implement tobacco control programs,” he said.
Franco Jose C. Baroña
He also recommended lower tax rates for smoke-free nicotine products, including heated tobacco products, arguing that these alternatives could help reduce smoking-related harms among smokers who are unable or unwilling to quit through conventional cessation methods.
“Set a lower tax for such products to encourage more smokers to switch to less harmful alternatives,” Laffer said.
