The Gravy TRAIN is leaving and common sense isn’t in it

December 4, 2017

INTROSPECTIVE by Romeo Bernardo

Business World | December 4, 2017

 

Otto von Bismarck once said that “laws are like sausages. Better not to see them being made.” No one would agree more than observers of the ongoing TRAIN legislation.

The just released Senate version illustrates the point. New ingredients surreptitiously found their way into the mix, diluting the DoF’s otherwise carefully thought-out recipe.

Package 1 of the reforms was intended to address the oppressive effects of inflation on taxable income — a phenomenon known as “bracket creep.”

To pay for the consequent revenue losses from raising taxable income thresholds and help fund the government’s ambitious Build, Build, Build Infrastructure program, oil and auto excise taxes were supposed to be raised to reflect current price levels, combined with the scrapping of VAT exemptions for 144 product categories that made our VAT system both unfair and low-yielding.

What has come out instead is a bit of a chop suey, due to the blatant accommodation of narrow-vested interests aiming to avoid paying their share of the tax effort or tilt the playing field against competitors.

Below are some of the more glaring examples.

EXPANDED TAX BREAKS FOR ECONOMIC ZONES, PEZA
Mind you, not just exemptions for the zones themselves but an expanded list for VAT zero rating for locators in the zones, including their suppliers, and tourism sites. Recall that some of these economic zones have been mired in controversy from birth, with reports of rampant smuggling of oil, automobiles etc.

LOWER TAX RATES ON LUXURY VEHICLES
The Senate version establishes two tax brackets for vehicles, 10% for those costing a million pesos or less and 20% for those costing more. Given where tax rates are today, this will have the effect of shifting the tax burden from buyers of high-end luxury vehicles to those of cheaper, everyday cars.

As one investor newsletter put it, “this new proposal looks like it was crafted specifically by and for luxury car dealers.” To illustrate, a Toyota Wigo (retail price of around P500,000) could see a price increase of around 8%. But a Toyota Land Cruiser (retail price over P5 million) could see a price decrease of over 20%.”

How does the Senate version hope to cover the revenue losses from these proposals? Some illustrations —

DOUBLING DOCUMENTARY STAMP TAXES
Taxing financial transactions is a last resort of the poorest African countries that possess few alternatives and weak collection agencies. This is not apt for our country — a supposedly dynamic emerging market economy trying to develop and promote its capital markets in a highly competitive region.

Such a tax raises the already high friction costs of transacting legitimate business in our country and diminishes our image as a center for investment. More fundamentally and over the long term, such costs impose a tax on savings and investment, on economic competitiveness, and on job-creation.

There has been no consultation on this and other measures, which were not meant for consideration until Package 4 of the DoF’s proposal covering capital income taxation. That the Documentary Stamp tax was brought forward way ahead of schedule reflects the size of the hole that will be created by the Senate’s generous exemptions and tax cuts.

COSMETIC SURGERY TAX
Purely cosmetic. A nuisance tax that will yield peanuts and burden revenue authorities and legitimate patients. Imagine every patient having to wait for his or her procedure to be certified as medically required before being allowed to undergo surgery free of tax? Inconveniences aside, this gives birth to new opportunities for rent-seeking and extortion, new income sources for less-than-scrupulous practitioners.

COAL EXCISE TAXES
From the current P10 per metric ton (MT) to P300 per MT — that’s a whopping three thousand percent increase. This measure comes out of nowhere, as it was neither in the DoF or Lower House version of Package 1.

Let me make the case against it.

First, a disclosure. I am an independent director of Aboitiz Power and Phinma, Inc., both of which have investments in coal power plants as well as in renewables. I am also the Private Sector representative in the Steering Committee of the University of the Philippines based Energy Policy Development Program (EPDP), co-chaired by the secretaries of NEDA and the Department of Energy.

The arguments of the proponents:

a) Coal needs to be taxed more due to the negative effect of its carbon emissions on the environment.

Whether this is true or not, the Philippines contributes less than 1% of world total CO2 emissions. At the same time, 35% of all the power we produce comes from renewable sources — a mix that is much more favorable than that of most countries, indeed better than almost all countries at a similar stage of development in the ASEAN and globally. (See “Carbon Footprint, Inclusive Growth and the Fuel Mix Debate in the Philippines,” by Raul Fabella et al, EPDP, PHL Economic Society Conference, Sept 22). We are doing more than our fair share to arrest global warming, even at the expense of cheaper electricity (renewables like solar and wind enjoy tax-payer-funded government subsidies).

b) Gasoline, diesel, and natural gas are taxed more than coal.

My friend, esteemed economist, and columnist, Ciel Habito, estimates that the tax on motor fuels is 10%, on Malampaya gas, 43%. He advocates that coal be taxed at P600 per MT, arguing that at an effective 15%, this will still be lower than the tax on Malampaya gas and the proposed 18% for diesel in the Senate version.

Ciel seems to overlook two considerations. The tax on motor fuels has never been about CO2emissions and climate change, a recent notion. It is about the “user pay” principle — motorists should pay for the roads that the government builds and maintains. And there is the second reason — to discourage the excessive use of private cars that contributes to traffic and air pollution. In economics-speak, “negative externalities” from urban congestion.

As for the taxes on Malampaya gas, this too has nothing to do with CO2 mitigation. These are royalty payments for the exploitation of the country’s natural resources. The government collects the same 60% share of profits from oil and, yes, coal producers.

Given this, why single out coal for a carbon tax? Why not a carbon tax on every fuel based on its impact on the ozone layer (which incidentally should also include LNG)? And why not throw in cattle-breeding, as cows emit ozone destroying methane with an aggregate impact similar to coal plants?

Regardless, using widely accepted global norms, EPDP Senior Adviser Prof. Jim Roumasset calculated the appropriate carbon tax for coal in the Philippines, given its contribution of 1% of the world’s CO2 emissions — P60 per metric ton. Not P100. And certainly not P300.

The P300 per metric ton tax on coal will add P0.14 per kWh to our cost of generating electricity. This is on top of another measure climate change advocates and renewable energy developers pushed for — feed-in tariffs, a fancy term for what are just subsidies from the taxpayer. Combined, they will add P0.43 per KWh to our electricity bills or, at current consumption levels, a total of P40 billion for 2018.

This resulting 10% hike in generation cost comes at a time when our DoE is working hard to bring down power costs to attract investments and create jobs in manufacturing. Note that power costs represent the bulk of cement production costs, causing our local champions to struggle against foreign competition. High cement prices make it more difficult to provide low-cost housing for the poor.

But all is not lost.

There is still a bicameral committee that can hopefully inject some sense into the tax package. We implore the committee members: Pass the TRAIN but hold the gravy, please.