An excise tax increase of 708 percent on low-priced cigarettes will add 1.13 percentage points to the projected inflation rate this year and could lead to losses in household incomes, jobs and economic output, a study done by economists from the University of Asia and the Pacific (UA&P) shows.
This translates to an alarming 34 percent increase in the government’s 2012 target inflation rate of 3.3 percent.
This is a significant increase that could potentially impact the country’s competitiveness, hamper growth of exports and harm the country’s improved standing with ratings agencies, thus  negatively affecting the country’s goal to receive investment-grade rating under President Aquino’s term.
The study also reveals that the bill approved by the House of Representatives providing for such excessively high tax hikes on cigarettes will result in a 50.5-percent drop in the sales of tobacco, which  would in turn, lead to the loss of P227 billion in terms of the industry’s output multiplier effects on the economy.
About P19-billion worth of household incomes and 90,633 direct and indirect jobs generated by the multiplier effects of tobacco manufacturing and sales would also be lost if the House-proposed tobacco cigarette tax hike is implemented, the study notes.
An amended version of House Bill 5727 authored by Rep. Joseph Abaya, which was approved by the House last June, seeks to impose excise tax increases of 708 percent on low-priced cigarettes, 297 percent on mid-priced brands and 150 percent on high-priced brands. The bill aims to collect an additional P31.5 billion in revenues.
The tax hikes would inevitably lead to higher cigarette prices.
 “A 58-percent weighted average increase in the selling prices of cigarettes will add 0.62 percentage points to the projected inflation rate of 3.3 percent in 2012,” according to the UA&P study.
But the study also takes into account that major low-priced brands may end up paying P28.30 per pack under the House tax proposal, if reclassified, thus the weighted average retail selling price can increase by 106 percent.
UA&P economists also warn that aside from its adverse effect on inflation, high tobacco taxes would pull down the growth of the country’s gross domestic product by 0.41 percent in 2013.
Cid Terosa, associate professor and vice-dean of the UA&P School of Economics, presented the multiplier-effect study at the Senate hearing on the excise tax. He is currently the director of the Applied Business Economics Program of the School of Economics. His field of specialization covers input-output economics, regional and urban markets and economic history and economic development, among others.
“Aside from the impact on inflation, the increase in prices of cigarettes can contribute to an increase in the production cost of goods and services in the economy,” the UA&P study says.
The production cost of goods and services in the economy will rise by 0.28 percentage points if prices of cigarettes increase by 58 percent due to the amended HB 5727, according to the study. “The sector that will exhibit the most substantial increase in production cost due to an increase in cigarette prices is wholesale and retail trade.”
Computations done by UA&P economists show that based on gross sales of P166.7 billion in 2010,  the output multiplier effect of the tobacco manufacturing industry is  P450.1 billion pesos for that year, which is  approximately 4.9 percent of the nominal gross domestic product in 2010.
The tobacco industry contributed significantly to job creation, with 179,674 additional direct and indirect employment generated in 2010.  “Without the industry, the total number of unemployed persons would increase by 6.3 percent,” the study reports.
The UA&P study also shows that P38.3 billion in additional household income was induced in the economy by the tobacco industry in 2010, further demonstrating the substantial contributions of the sector to economic growth.
The study also estimates that the P54.03 billion in taxes paid by the industry in 2010 would have induced P212.5 billion of additional output in the economy if the amount was spent well.