• Fueling the govt’s tax appetite

    Ben D. Kritz

    Ben D. Kritz

    EXCISE taxes on fuels have remained unchanged since 1997, and that is something Finance Secretary Carlos Dominguez thinks ought to be changed.

    Under the present excise tax scheme, fuels are taxed at various fixed rates on a per­liter or per-kilogram basis up to P4.50 per unit. The excise tax on a liter of ordinary unleaded gasoline, for instance, is P4.35.

    The excise tax rates, which are lower for auto diesel as a sop to the public transport sector, were established in 1997, and as Dominguez pointed out last week, “P4.50 then is not worth P4.50 right now.”

    The solution to what amounts to steadily declining tax revenue on a per­unit basis, Dominguez suggested, is to index the excise tax to inflation. Starting with an adjusted base rate of P10 per liter for gasoline—derived by multiplying the existing P4.35 per liter tax rate by a cumulative inflation factor of 2.37—and P6 per liter for diesel, the excise tax would be adjusted annually for inflation, or up to 4 percent per year, Dominguez explained.

    Because oil prices are now low, raising the excise tax would not present too much of a hardship on consumers, and could generate up to P132 billion in additional revenue, according to the comprehensive tax reform plan bequeathed to the Duterte administration by its predecessor. The additional revenue presumably would more than offset the proposed lowering of individual and corporate income taxes, and help to fund the government’s ambitious infrastructure investment objectives.

    Dominguez’ suggestion makes sense from a general economic point of view, but is actually a fairly draconian measure in the Philippine context. Fuel is unique in that it is taxed two ways: First, the excise tax, which is based on unit volume of consumption, and second, the value-added tax based on gross value of consumption, which was retained in 2012 by the Aquino administration, despite widespread calls to scrap it.

    Both taxes are considered regressive, because consumption of equal amounts results in a larger proportional tax burden on people with low income; because low income motorist needs to spend a greater proportion of his income on a unit of fuel than a higher income motorist. To compensate for this, the fuel low income consumers are most likely to use, diesel, is taxed at a lower excise rate. As a further safety net for low income consumers under the proposed excise tax increase, Dominguez also suggested a government subsidy could be introduced if oil prices returned to higher levels, perhaps being triggered at $90 per barrel.

    A back­of­the­envelope calculation indicates that Dominguez’ proposal would add a bit more than 14 percent to the price of gasoline, and about 10.4 percent to the price of diesel when excise tax rates is adjusted at the suggested P10 per liter and P6 per liter, respectively.

    There is a well known principle that states the revenue potential of a tax system is inversely proportional to its complexity, and it is a trap that governments often fall into through their efforts to collect as much tax revenue as they can. Fiddling with the excise tax on fuel potentially creates a tax system that is bound to produce progressively less revenue. However, there is an alternative the government could consider to ensure a reliable revenue source without running afoul of some of its other acknowledged responsibilities, such as reducing the economic inequality and promoting the use of cleaner energy.

    Instead of raising the excise tax on fuel, the government ought to eliminate it, at least as it applies to finished fuel products. The VAT should be maintained, and could perhaps even be raised to 14 or 15 percent, something that current Budget Secretary Benjamin Diokno has been advocating for years. The government’s potential revenue gain would of course be severely reduced, but what would be left would be very stable, and not be subject to oil price volatility. Further stability would be provided by the buying behavior of the typical consumer, which is value-based rather volume­based. The typical consumer buys vehicle fuel according to a monetary value he or she has available for the purpose, regardless of the underlying price of a unit of fuel.

    To make it work fairly for both the government—which, after all, is entitled to collect taxes to fund its functions and programs—and the consumers, the indirect subsidy given to consumers of diesel fuel in the form of a lower tax rate should be eliminated. Diesel consumers do not entirely lose their advantage due to the price of diesel fuel being somewhat lower than gasoline as a matter of routine. Various tax incentives—exemptions under certain conditions, or lower tax rates—encourage the use of the cheaper, more polluting diesel fuel. Therefore, removing them is likely to encourage at least some consumers to switch to cleaner gasoline. Besides it is economically more rational.



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    1. bullshit, we are talking of creating jobs. if prices of gasoline is high it will create a DOMINO EFFECT to the manufacturing sector. GASOLINE is one of the most critical in building INDUSTRY

    2. Mr. Kritz, with all due respect, fuel excise taxes are not as regressive as your reasoning suggests. It is regressive if fuel usage per capita is constant. But fuel usage is positively correlated to income level. Let me explain:

      a) In terms of direct usage of fuel, our poorest citizens walk or commute to work, while our richest prefer large-displacement sedans and SUVs. They also travel for many purposes besides getting to/from work.

      b) In terms of indirect usage, our poorest consume necessities, whereas the range of goods and services consumed by the affluent induce much more fuel consumption (delivery trucks, etc.) on a per capita basis.

      I see no reason to believe there is a major discontinuity between the two extremes I have pointed out. Thus I believe that the rich will pay a progressively higher spare of an increased fuel excise tax.

      As for simplicity of implementation, the advantage of adjusting excise taxes is that the apparatus for collection already exists and is limited to the a small number of (legitimate) fuel importers. With VAT adjustment, a large number of vendors would need to adjust their POS systems, and there would be unintended cost increases across-the-board for many many goods and services.

      I am puzzled why, on one hand you lament that fuel was not exempted from VAT in 2012, then you recommend to raise the VAT and phase out the excise tax. In my view, that would constitute an effecitve tax decrease for fuel and would, as above analysis shows, be a tax-regressive move.

      Lastly, taxing fuel incentivizes the conservation of fuel, the reduction of pollution and CO2, and the development of alternatives. It might even encourage more people to mass-transport, or at least carpooling.

      An inflation-indexed, per-unit, fuel excise tax is a solid revenue base, is fairly progressive, and advances policy goals.

    3. Amnata Pundit on

      Not to mention that it will also continue to create more traffic by encouraging more people to buy cars, especially with the help of liberal financing. I remember many years ago when oil went up to $140/barrel, the traffic in Manila eased considerably. The lesson therefore is to make fuel more costly and you will reduce traffic.