The late Chief Presidential Legal Counsel and Senator Juan Ponce Enrile served as my trusted partner for 26 years in our television program, ‘Dito sa Bayan ni Juan.’ In every discussion on taxation, I benefited from his extensive knowledge as a tax specialist. His insights enriched every discussion on the topic. Yet the counsel I will always cherish is his reminder: ‘Taxes can build or destroy. Always remember that, Jess.’ Although my television partner has now passed, his perspective continues to guide me in every conversation about tax matters.
In a recent column, I wrote about the danger of good intentions. Last August 25, I represented FPI during the House Committee on Ways Means hearing, where the discussion turned to proposals to increase taxes on smoke-free alternatives such as heated tobacco products (HTPs) and vapes. Again, the intention is understandable as the government needs revenue and it also wants to protect public health.
But will higher taxes actually achieve these objectives?
As an industry advocate, I have always believed that taxes should be reasonable, predictable and fair. They should raise revenues without destroying legitimate businesses or creating opportunities for smugglers.
Unfortunately, we already know that consumers look for cheaper alternatives when the price difference between a legal product and an illegal one becomes too wide.
When a legal manufacturer produces goods in the Philippines, it pays taxes, employs our workers, follows our laws and regulations, and buys goods and services from other local businesses.
The smuggler does none of these things.
We should learn from what has already happened with cigarettes. As taxes and prices increased over the years, illicit cigarettes became increasingly attractive to price-sensitive consumers. The result is a large illegal market that deprives the government of revenue, takes sales away from legitimate businesses, and ultimately threatens Filipino jobs and livelihoods. We should be careful not to repeat the same mistake with smoke-free products.
This is why I believe we should be very careful about proposals to sharply increase taxes on smoke-free products.
Government revenues from the HTP category are reportedly growing by around 36 percent year on year, which should tell us something important. Instead of taxing these alternatives so aggressively that consumers are pushed back toward cigarettes or into the illicit market, policy should allow legitimate smoke-free alternatives to develop responsibly.
This is an opportunity for the Philippines to participate in the transition toward newer smoke-free technologies, and not simply as a consumer market, but eventually through investment, skills, and economic activity. Investments in innovative technologies have a multiplier effect as it leads to sourcing of local inputs, logistics, and back-end services that generate employment. The country will have a competitive advantage and open up market opportunities beyond our shores. Government policy should encourage legitimate businesses to invest in better technologies rather than make that transition more difficult.
There is an old saying: Do not kill the goose that lays the golden egg.
In this case, the question is not simply whether government can collect more tax from a new category. It is whether tax policy can encourage adult smokers to move toward better alternatives, while keeping these products within the regulated and tax-paying market.
If we tax too aggressively, we risk doing exactly that. We may project more revenue per pack on paper but end up slowing the growth of the legal market from which those taxes are supposed to come.
There is also a public health question that policymakers should not ignore. Not all nicotine products carry the same risk. Cigarettes burn tobacco, smoke-free products do not. The burning process produces the thousands of chemicals that cause smoking-related diseases. This difference is precisely why the principle of risk-proportionate taxation deserves serious consideration.
Taxation can be used not only to collect money but also to encourage better choices. If an adult smoker has the option of switching to a less harmful alternative, government policy should not remove the economic incentive to make that switch.
This brings us to vapor products, where the situation is even more alarming. In FPI’s position paper on House Bills 1316 and 5364, we pointed to regional data estimating that 84.5 percent of vapor products sold in the Philippines are illicit. The same data estimated foregone government revenues at around US$188.4 million in 2024.
What will happen if we make legal vapor products even more expensive? We should not expect the illicit traders to disappear. We may simply give them more customers.
And if legal vapes eventually become as expensive as, or more expensive than, cigarettes because of taxation, we also have to ask why a smoker would have a financial reason to switch away from cigarettes. That would defeat the purpose of risk-proportionate taxation.
I support the proposal to unify the tax rates on vapor products. Our present system, which imposes different rates on nicotine salt and freebase products, is unnecessarily complicated and creates opportunities for misdeclaration and tax leakage.
But a unified tax should also be a reasonable tax. The objective should be simple: make the legal market competitive enough to defeat the illegal market, while preserving a meaningful tax differential between cigarettes and smoke-free alternatives that reflects their different risk profiles.
The same caution applies to proposals to further increase taxes on sugary drinks. There are legitimate public health concerns surrounding excessive sugar consumption, but Congress itself is examining whether the present volume-based tax is the best way to influence consumer behavior.
We should also recognize that the government already uses policy to encourage consumers and industries to adopt newer and better technologies. Electric vehicles are a good example. Through tax incentives and other measures, the government has encouraged the shift to EVs. The principle is straightforward: when technology offers the potential for a better outcome, policy can help consumers move in that direction rather than treat new and old technologies exactly the same.
Before increasing another tax that will ultimately appear in the price paid by ordinary consumers, government should first ask whether the tax is properly designed to achieve its health objective.
The FPI strongly supports tougher action against illicit trade, including better tracking and tracing, tighter control of manufacturing equipment, stronger accountability for online marketplaces and greater coordination among government agencies. But enforcement and taxation must work together.
A tax rate cannot be considered successful merely because it looks high on paper. We must look at how much government actually collects, how many jobs and investments are created, and how much of the market is being surrendered to smugglers.
Good tax policy is not about finding the highest rate government can impose but finding the rate that actually works.
Don’t kill the goose that lays the golden eggs-feed her instead. This is the best way to get more golden eggs.
Dr. Jesus Lim Arranza is the Chairman Emeritus of the Federation of Philippine Industries and concurrent Chairman of the Anti-Smuggling and Anti-Illicit Trade Committee.