July 24, 2022

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Why we resist the suspension of fuel taxes and the reversal of other hard reforms

The latest Pulse Asia Survey poll on the public’s most pressing concerns reveals that inflation is the most urgent issue among Filipinos (57%), followed by other economic issues such as workers’ incomes (46%), poverty (33%), and jobs (29%)1. The data show how highly concerned most of us are about the uncertainties of post-COVID recovery and just how close to home inflationary pressures are becoming.

Comparing Consumer Price Index (CPI) figures over the past two years, average prices have risen at a compound annual rate of 4.9%2. Owing to rising fuel prices, inflation in transport commodities and services has been the most pronounced at 13.6%. This issue is what prompted presidential candidates to call for the suspension of fuel excise taxes during the election cycle and it is why several legislators will continue to push measures to suspend fuel excise taxes.

I wrote in April 2022 about why fuel tax cuts are a poor solution to rising transport prices, and why direct and targeted fuel subsidies are superior3. The costs of a fuel tax suspension would simply outweigh the benefits. The forgone revenue worth P131.4 billion would essentially cut the government’s ability to spend on services and subsidies for the vulnerable sectors. A general subsidy through suspending fuel taxes to afford lower pump prices disproportionately benefits the car-owning class of Filipinos more than the rest4. Car owners belong to the top 10% in terms of family income.

For instance, jeepney drivers who are losing income due to rising prices certainly ought to be provided assistance. Targeted fuel subsidies will essentially serve as transfers from the car-owning households, who pay the bulk of the tax, to the jeepney drivers — and also to the poor and the public using public transport who will benefit from the subsidy. A fuel tax cut by suspending the tax would achieve a transfer in the opposite direction. This is why we are better off spending fuel tax collections directly on the poorer segments of society rather than losing out completely on the revenues.

Unfortunately, there is a tendency to become squeamish about recently passed reforms when times become tough. Reforms seem to be backwards sticky in that securing good reforms requires long-run vision, tremendous effort, and a lot of luck, and yet the undoing of these reforms takes only an overeager or miscalculated approach to address immediate or short-term concerns. I would argue that crises should push us to not only follow through on these reforms, but to serve as opportunities to further pursue our reform agenda.

The fact that the TRAIN Law (Tax Reform for Acceleration and Inclusion) was a major tax reform program, passed during a non-crisis period, was lauded then. And its advantages are demonstrated now. The additional revenues from TRAIN have provided fiscal room for our government to finance its COVID-19 spending.

Many of us are concerned about the country’s significant debt, but we are in much less dire straits than we would have been without the reform. The package of excise taxes in TRAIN may not have been a politically popular measure (although a survey belies this), but it is what has afforded the effective reduction in personal income taxes thus providing higher disposable incomes for the middle class, the additional cash transfers for the poor, and the increase in spending for public goods.

Also consider the Rice Tariffication Law (RTL) which was passed during a time of inflationary pressure. The immediate clamor from different quarters to repeal the law almost caused Congress to flinch, but because we persisted with the reform, food inflation is not as pronounced as it would have been without RTL. Rice prices have been stable despite the pandemic and this stability is likely to have averted even worse outcomes for poverty and hunger. The reform has also introduced massive tariff collections, P17.9 billion in 2021 and P14.7 billion in 2020, which will be game-changing once the resources are properly mobilized towards our local farmers5.

With the current inflationary episode, the quick fix is seemingly to roll back taxes to push prices down. Taxes are politically unpopular and difficult to pass so the longer-term consequences of rolling back the just-passed tax reforms now will mean that widened deficits and a shrunken fiscal space will persist in the future. This will hamper our ability to recover from the pandemic, not to mention pay off our debts. Strategically reallocating or redirecting resources towards vulnerable stakeholders is a much more pragmatic and equitable solution and without the long-term side effects of a reform reversal. Spending a portion of the P131-billion fuel tax revenues for the 900,000 jeepney drivers, for example, will be a better outcome than losing out on all the revenues from a tax cut.

The temptation to undo the hard reforms won in previous administrations is there. The good intentions of policymakers to act quickly cannot be questioned. However, if we are too hasty and imprudent in our response, we only make the present situation worse and endanger sustainable long-term growth.

1 Rising prices top concern among Filipinos — Pulse Asia, BWorld Online, July 12, 2022 https://www.bworldonline.com/the-nation/2022/07/12/460833/rising-prices-top-concern-among-filipinos-pulse-asia/

2 CPI Data from Philippine Statistics Authority

3 Why targeted fuel subsidies are better than fuel tax cuts, BWorld Online, April 10, 2022 https://www.bworldonline.com/opinion/2022/04/10/441464/why-targeted-fuel-subsidies-are-better-than-fuel-tax-cuts/

4 DoF estimate on forgone revenue cited in Fuel excise tax suspension will induce more economic activities — Poe, BWorld Online, July 7, 2022, https://www.bworldonline.com/the-nation/2022/07/07/459999/fuel-excise-tax-suspension-will-induce-more-economic-activities-poe/

5 Rice tariff collections at nearly P18 billion in 2021 — Customs https://www.bworldonline.com/agribusiness/2022/01/03/421186/rice-tariff-collections-at-nearly-p18-billion-in-2021-customs/

 

AJ Montesa heads the fiscal policy program of Action for Economic Reforms.