New car tax scheme is a problematic potential benefit

Ben D. Kritz

Ben D. Kritz

THE proposed increase of the excise tax on vehicles, which proponents say will improve gov-ernment revenue and help to reduce traffic congestion, has met with predictable resistance from the automotive sector and consumer advocates, who fear the almost-certain negative impact the measure will have on the Philip-pines’ booming car market. It is an issue in which both sides are partly right, but mostly wrong.

The tax structure being proposed would raise the excise tax on cars from 2 percent to 5 percent on cars with a manufacturing/importation price of P600,000 or less. For vehicles priced between P600,000 and P1.1 million, the tax would be raised to a flat 20 percent from the existing formula of P12,000 plus the excess over the P600,000 floor price. Cars between P1.1 million and P2.1 million would be taxed at 40 percent, while those over P2.1 million would be taxed at 60 percent.

The main reason for the higher excise tax, along with other adjustments such as extending income taxes to bonus pay, removing some exemptions from the value-added tax, and raising the excise tax on fuel is to make up for tax revenue that will be lost from readjusting the income tax brackets. On that basis, a higher vehicle excise tax generally makes sense.

The secondary reason for the higher vehicle excise tax, reducing traffic, is in all likelihood, completely spurious. Most commentary on the topic (mainly from the US and Britain) suggests anecdotally that raising vehicle taxes has little to no impact. A World Bank study done in 2008 actually did quantify it, and found the effect was insignificant; extrapolating that study’s results to the Philippines suggests the proposed tax scheme will reduce total vehicle kilometers by 0.6 percent to 1.2 percent—a degree of relief long-suffering motorists around Metro Manila and other congested urban areas are not likely to notice.

The automotive market here is growing rapidly, and from a financial point of view, the government would be foolish not to tap its potential as a revenue source; in terms of “fairness,” excise taxes are preferable to income taxes, because they offer the consumer some degree of choice. A person does not necessarily need to buy a car, or buy a car of a certain value, and therefore is not compelled to pay the tax, in contrast to income taxes or a blanket VAT on basic necessities.

The excise tax, however, should not be so high as to kill the very resource the government is seeking to use, and in that respect the current proposal is unacceptable. The tax rates proposed are frankly obnoxious, and would definitely impact vehicle sales to the extent that growth in the industry would be discouraged, which would ultimately make the excise tax self-defeating. It would, in fact, be worse than that, because all the other potential revenue the automotive sector indirectly enables—income taxes from more employed people, VAT and business taxes from other sectors where newly-employed people would be spending their money, VAT from sales of parts and components, excise tax from vehicle fuel—would suffer as well.

At what rate the vehicle excise tax would strike the right balance between being a viable source of revenue without significantly slowing growth is something that would require a careful, comprehensive analysis, something the current administration has so far indicated it considers complete anathema. Raising the vehicle excise tax is an idea worth studying, but that first step—studying it—has to be taken, and clearly it hasn’t been yet. The legislature should do everyone a favor, and send the current proposal back whence it came marked “incomplete.”


Please follow our commenting guidelines.

1 Comment

  1. observant nobody on

    here is an idea of a concept with which most Governments seem to struggle: SPEND LESS MONEY! more specifically: spend less of OUR money!