The highest possible tax is not always the smartest tax

The highest possible tax is not always the smartest tax There are two ways to look at a tax increase. From the government’s side, it is revenue. A product can be taxed, so raise the rate and collect more for healthcare, education, infrastructure, and basic services. From the consumer’s side, however, it is simply another peso added to the bill. So much is the average Filipino’s cost of living these days, that the household budget has become an exercise in subtraction. In June, Philippine inflation stood at 6.4 percent according to the Philippine Statistics Authority’s (PSA). For households in the bottom 30 percent of the income distribution, it was even worse: 8 percent. So it seems like an especially strange moment for the government to consider making another legal consumer product dramatically more expensive. Before Congress are proposals to impose excise taxes of P61, P66 or as much as P72.90 per milliliter on vapor products. There are also proposals to impose a new P120 to P150 excise tax on vapor or heated-tobacco devices. Then there is HB 5207 and related bills, which take a markedly different approach: one tax of P10 per milliliter on vapor products, regardless of whether the liquid contains nicotine salt or freebase nicotine, while preserving lower tax for products that do not burn tobacco. This is not an argument for no taxes. Rather, it is an argument against expecting consumers to behave exactly the same no matter how much the government taxes them. At this juncture, we must ask how high can taxes go before they begin defeating their own purpose. There are two main types of nicotine formulations used in vapor or e-cigarette products: nicotine salt and freebase nicotine. The Philippines currently applies vastly different excise tax rates to the two. Nicotine salt is taxed at P60.20 per milliliter and freebase nicotine at just P6.95. In 2021, nicotine salt accounted for essentially the entire declared market. By 2025, 98 percent was reportedly freebase. In a previous hearing, Senate President Sherwin Gatchalian had estimated revenue losses from misdeclaration at P14.8 billion annually. During a House Committee on Ways and Means hearing on August 11, Rep. Rufus Rodriguez pointed to BIR data showing that more than 90 percent of vape excise collections in 2025 came from freebase nicotine. His conclusion was blunt: “In reality, we already have a de facto single tax rate system for vape products. We just don’t know it.” The tax system has essentially created an invitation to arbitrage. HB 5207 and similar measures offer the more sensible solution, which is to abolish the distinction and impose a single P10-per-milliliter rate. The proposal is estimated to generate around P6 billion in annual collections while making administration considerably simpler. Compare that with simply pushing rates upward. A legal 10-ml vape product already costs around P580, while an illicit equivalent can sell for roughly P350. Raise the legal price substantially and we should not be surprised when consumers discover the cheaper seller. As PECIA President Joey Dulay told lawmakers during the same hearing, “Every peso added to the legal price becomes another peso of advantage for illicit sellers.” A tax increase does not magically increase a consumer’s disposable income. The smoker or vaper standing at a store still has the same wallet. When the regulated product becomes prohibitively expensive, some consumers may quit. Others will find a cheaper product. And illegal sellers will be waiting in the wings. HB 5207 also preserves the principle of risk-proportionate taxation. This simply means that taxation must recognize the difference in the risk profiles of cigarettes, heated tobacco and vapor products. Higher risks mean higher taxes. Cigarettes burn and produce thousands of deadly chemicals; vapor products do not. A sensible tax structure should recognize these differences without creating price distortions that hand an even greater advantage to illicit sellers. The goal should be to keep regulated products within reach of legal-age consumers while ensuring that legitimate businesses are not placed at an impossible disadvantage against the black market. Other countries have recognized this logic. There are tax differentials between smoke-free products and cigarettes of roughly 95 percent in the United Kingdom, 90 percent in Sweden and New Zealand, and 45 percent in Indonesia. Seventeen out of 20 European countries impose substantially lower taxes on e-cigarettes than cigarettes. This matters particularly now when Filipinos are already absorbing higher prices they did not choose. Yes, nicotine products should be taxed. Yes, the government needs revenue, including for Universal Health Care. But the objective should be to collect taxes sustainably while keeping the market compliant and legal. Calls to simply raise vape taxes to the “highest level possible” miss an important part of the equation. The highest tax rate on paper does not necessarily produce the highest revenue. What matters is how much the government actually collects after consumers, businesses and illicit traders respond to the new price. Tax policy should therefore be judged not by how high a rate Congress can impose, but by whether that rate can actually be collected. At a time when every peso already buys less, the smarter policy is not necessarily to tax as high as possible. It is to tax at a level that works.