THE INSIDE MAN

HB 4774 : How to tax the auto industry to death

HB 4774 : How to tax the auto industry to death image

Tito F. Hermoso / AutoIndustriya.com, Mitsubishi Motors | January 27, 2017 15:21

Death by taxes: Double jeopardy

Auto excise tax jumps

Last 05 December 2016, INSIDE MAN warned the public about the impending Comprehensive Tax Reform. that is being studied for legislation by Congress. In our column “Death by Taxes: the excise of the auto industry” we agreed in principle that some taxes have to be raised in order to compensate for the decrease in other taxes on income meant to increase the take home pay of the employed, reduce the near impossibility of paying inheritance taxes and many more noble and pro-growth objectives like free medicines, tuition etc. The main objective? Funding the mega-trillion infrastructure projects, delayed for some 30 years, which is needed to shift the public's transport preference from private cars to quality mass transit. Besides an already stringent DoF proposal, the Congress wrote up its own more stringent version called House Bill 4774. 

Greed and detached from reality

Judging by the proposed tax rates, whoever drafted the humungous increase in automobile excise tax for the DoF and House Bill HB 4774 is 1. greedy, 2. does not understand behavioral economics 3. does not understand price elasticity of demand and marginal utility and, 4. did not bother to simulate market demand reaction, and should, therefore not have passed Freshman college Economics 1 and 5. should not have gotten a job drafting tax laws in the first place.

Dreaming 

Having seen the initial projected revenue jumps for 2018 [ranging from 70B to 90B], the targeted year of implementation of HB 4774, it is patently obvious that these tax law framers are out of touch with reality. I suppose they threw a “pie in the sky” dream target revenue and actually believed that the record sales of 2016 will just recur again and again, come the hellish high water of their tax raising usury.

High price, sales loss, tax collection low

The glaring fault in both the proposed DoF and the more merciless HB 4774 tax increase is the assumption that sales of vehicles will remain the same regardless if the increase in taxes double the SRP and in some cases adds another 25% to the already doubled price. Mind you this tax is nationwide, as there is no discrimination whether you live in a heavily trafficked city or not, the taxes will be the same. So those who think that HB 4774 has an urban traffic decongestion advantage, well, think again.

HB 4774 : How to tax the auto industry to death

Doing the numbers

Using forecasting tools on end October 2016 CAMPI sales figures last year, getting the sales of different spec levels, their share of the sales pie and their respective excise taxes paid for each of the 4 price segments proposed by the DoF, I projected 375k total 2016 sales for CAMPI members alone and a total 35.0 B [excise tax only] tax take for BIR. Applying the DoF formula in my econometric model yielded a collapse in sales to 190k units for 2018 supposing the law passes in 2017 and a drastic reduction in tax collected at 24B. The effects of HB 4774 are even worse. Take note though that our forecasts made in 2016 does not include the AVID imports, which, when added gives rise to an all time record auto sales of some 404,051 units for 2016. Moral of the story, high tax, leads to less sales, ends with less tax collection.

No sale, no tax collection

Why did the sales decrease? Because the tax increase was so high the desired cars became unaffordable. What DoF and the framers of HB 4774 isn't even evaluating is the loss of jobs, the closure of many redundant dealerships and the loan defaults this will cause since dealers took on more bank loans to expand service and sales facilities. DoF may not worry as much but surely DTI would and also the DOLE as job losses swells the ranks of the unemployed. This, of course is not something the Left would complain about as the unemployed will be ripe for indoctrination in the Leftist cause of hating the “greedy” capitalists. These tax framers erroneously believe the market will pay any price to buy a car. Meantime used car prices will soar and the grey market becomes viable again.

Assume downsizing but still buoyant sales

The question now is why didn't the tax researchers under DoF Usec. Karl Kendrick T. CHUA simulate the drop in sales owing to the huge tax increase? We suppose that they assumed that buyers will shift to smaller and cheaper vehicles as they assume sales of cheaper and smaller cars and MPV's will still keep the market on boil. Granted, even assuming this unlikely sales “status quo”, the tax revenue will still drop because the tax take of the cheaper and smaller vehicles is quite small.

Increased entry level sales, mostly “A” segment?

We are willing to go along with the assumption that the rise to 404,051 units for 2016 was fueled by the boost in sales of “A” segment cars, i.e. Wigo, Mirage, Alto, Eon, although whichever year one looks at, the LCV's [light commercial vehicles] always outnumber PC's [passenger cars] in overall sales, usually at 60.0%-LCV; 40.0%-PC. By definition LCV's include AUV's, the all important MPV's, passenger vans and SUV's, vehicles that carry more than 5 people.

HB 4774 : How to tax the auto industry to death

LCV dominant and the Subic JDM's

The Philippine auto market is a predominantly SUV market. Proof is that during the height of the Subic JDM Import business in 2003, the country's vehicle mix was still the same 60-40, from a total of 150,000 units sold by some 10 to 12 domestic brands. That's 90,000 LCV's. Then add the 180,000 Subic imports, ALL LCV's, that paid no tax to the government, then you've got 270,000 LCV's vs. 60,000 PC's [passenger cars].

Family centric consumer values

This overwhelming preference for LCV's is due to the fact that Filipinos, once they start getting a comfortable income, do not hesitate to plan on bigger families, with or without the RH Law. With the bigger families, the main consideration is to also bring all into one house [and car], to include the older generation, whether direct descendant or in-Law. Filipinos are no believers in throwing out teenagers to fend for themselves when they turn 18 and throwing the old folks to Homes for the Aged when they become frail and irritating. Thus they buy AUV's, SUV's, MPV's and vans which bumps up the recoded sales of LCV's.

Error in assumption

Now here lies the fatal assumption of Usec Karl Kendrick T. Chua's team. They lumped the Filipino families 1st priority starter purchase of a car – the LCV- into the luxury car bracket because it falls into the 1.0-2.5M price range. This category gets hit by a punitive 27.3% increase in excise tax, putting it out of reach. In fact this category, including the locally assembled Toyota Innova will be hard hit in 2017, losing more than 50% of its customers due to this huge price hike. Perhaps, DoF assumes that the Filipino family car buyer will shift to the cheaper “B” segment Avanza but then it is still too small and even if some settle for the smaller Avanza, the tax take will be smaller too.

Abusing private car owners

Even the tax increase main purpose - to fund the mega trillions of infrastructure that the government wants to provide quality mass transit so the public will shun private cars – seems not to take into account that the private car owner has been, since time immemorial, taxed excessively as it has always funded not just better roads and railways but also subsidies for abusive bus, jeepney and tricycles. Private car owners are being stewed in their own juice. The problem with cars is that some tax framers erroneously still think of them as a luxury in our public transport starved islands. So its a chicken and egg situation; Private cars are a necessity because there is no efficient mass transit vs. there is no efficient mass transit because not enough taxes are collected from private cars to subsidize mass transit. All the more reason why private car purchasing and ownership shouldn't be taxed unto death.

HB 4774 : How to tax the auto industry to death

Speak with forked tongue? Then FDI withers

Our last argument against raising auto taxes at this time should be better made by the DTI and their now endangered CARS local manufacturing incentive program. To begin with, DTI has only bagged 2 – Mitsubishi and Toyota – from a projected 3 entrants. Which only proves that this CARS programs may need some fine tuning. The new taxes was never in the cards when DTI got commitments to invest from Mitsubishi and Toyota. The new taxes constitute new conditions and a paradigm shift in the feasibility of building cars locally. Which is totally in character with the previous government, which tended to tear up or modify previously committed to contracts, just when the proposed FDI [foreign direct investment] was about to be remitted. Not good for our international investment image, which already identifies us as being “unfaithful” to our obligations on a signed contract. A loss of image means more lost employment opportunities and fresh capital. And probably still-born Mitsubishi and Toyota factories. And let us not forget the further retraction of the auto components manufacturing industry, an industrial sector we've long been championing but suffers from being taxed to death and saddled with irrelevant and unusable tax incentives.

The goose that lays the golden egg

As for taxing luxury cars - remember the vanity tax? Like any business or product, if taxed too high, consumers will buy their vanity and luxury product elsewhere, usually somewhere or from someone who doesn't pay the government any tax. Just like everyone else, greed by government, will get them nothing and nowhere. Case in point - the luxury segment, gets hit by excise tax increases up to 72%, opening the flood gates to the return of the grey import market, a market where government was never able to maximize tax revenue. For all the government's braggadocio about culling smuggling, their record has been very very poor considering that cheap fuel imports from oil price subsidized countries like Indonesia into Mindanao have even severely undercut pricing of gasoline from officially taxed sources. So what revenue increase can government get if the legitimate luxury car market shuts down and the grey market takes over? Better to keep Willie Tee Ten [British United], Robert Coyuito [PGA], Felix Ang [CATS-Auto Nation], Wellington Soong [Autostrada Motore] in business as they pay tax than bankrupt them while the rest of the luxury imports go through the grey market from which the government gets Nada. In fact, the luxury car imports contribute large amounts to the tax coffers at minimum effort to the BIR i.e tax paid by every Mercedes sold by Felix Ang's CATS Motors, is far easier to collect than the tax from twenty Hyundai's that Felix's AutoNation dealers sell. That is, just in case, the purpose of this administration is NOT to shut down/EJK legitimate businesses that are owned by “oligarchs” like Bobby Ongpin.

Yes to fuel taxes

As far as the rest of the tax increases, we agreed with the proposed 3-stage increase in fuel taxes, considering [DoF] government's restraint from collecting taxes on fuel since 1998 and we even opined that during the era when oil prices leveled at USD 35.00/BBL, government should have taken advantage by taxing fuel to recover lost revenue as early as then.

Yes to “some” inflation 

We also agreed with the government assumption of the inflationary effects on general prices as fuel price increases will trigger all around price rises. But we also believed government figures, showing that the rise in inflation will only be 2.0 to 3.0%, well within the ceiling of 4.0% set by the monetary authorities. 

HB 4774 : How to tax the auto industry to death

Yes before, now No – growth won't compensate higher taxes

Three months ago, we also agreed with the DoF's assumption, that most collateral increases [fares, tolls, cost of goods sold, salaries, transport allowances, power generation, utility, food] due to fuel price increases will be passed on to production costs which the DoF hopes can be absorbed by the fast growing economy with little harm or slow down. Today, we now doubt this because of the uncertainties of world economic growth [Federal Reserve raising interest rates, Pres. Trump's hostaging US investment abroad, rejecting exports from other countries, starting a trade war with Mexico, China and the EU, sending home legit migrant workers, etc.] where the decline in purchasing power may not be sufficiently absorbed by the increase in take home pay caused by the income tax cut, that is, if you have a paying job.

Idiot arguments 

We certainly expect the bleeding heart liberals and self-appointed spokesmen of the “poor” or the “masa” [masses] to claim that cars are only bought by a small percentage of the population and since they have money they should be taxed. In the first place, cars, [and those who can afford them] are already taxed in many stages and not just by an excise tax. As for the poor, the majority of the masses, they are not taxed directly because they are poor. At the most, they are taxed indirectly. Say, when a company that makes candies, pay taxes to the government, the candy maker passes on those taxes to the buyer, rich or poor.

The irony on collections

Remember the adage: no sale, no tax? Here is a case when government taxes a product too high that sales will decline and so will tax collections. The shut down of the luxury car industry which accounts for a huge portion of auto taxes collected and the huge drop in sales actually defeats the purpose why DoF raised taxes in the first place. Ironically, in the quest for more tax revenue, in raising taxes too high, BIR ends up with less revenue. If this still cannot be understood by the “tax-only-the-rich” brigade, we will segregate the Comments section, with a special section called “idiot's arguments”.

BIR don't forget; less sales = less tax collections = less revenue

Government should be careful in anticipating businessmen and business climate reaction to its pronouncements. Tall Order when we have a President who values candor above discretion and temperance. The proposed new taxes on cars is already drawing criticism and grave prophecies of the collapse of local auto industry, an industry which is heavily taxed as it is. Government should also rationalize the tax incentives to the auto industry so that they can maximize revenue. If this auto excise tax raise passes, it will spell the end of the car sales boom. Just when the government has finally gotten the right tax mix for the auto sector, finally producing results that would have validated the PCMP of the 70's and the MVDP of the 90's, we now get this disruptive HB 4774 that will do more harm than good. All that for far reduced tax revenues? Leave well enough alone AND do not kill the goose that lays the golden egg.

Quid pro quo for the tax framers

Perhaps, drafters of tax laws like this HB 4774 should also get to feel the effects of the laws of economics at work so that their proposed tax policies follow the laws of economics so that they get to feel the effects of what they propose or dream about. After all, as economists say, there is no such thing as a free lunch. For every punt or risk taken there is a price to pay. If and when this HB 4774 tax passes into law, the framers, the solons who voted for it and the technocrats of the DoF that pushed for it should also bear credit and responsibility. If by end 2018, and HB 4774 does not produce the increase in tax collections called for and also resulted in dealerships closing, loans defaulting, job losses and a further ruin of our investment climate, it'll probably be just small beer for those responsible for framing, supporting and voting for HB 4774 to join the the closed dealers, jobless and loan defaulters by losing their jobs. Small price to pay for killing the auto industry and shrinking the manufacturing sector as well.