THE INSIDE MAN

The Senate: The last stand vs. high auto excise taxes

The Senate: The last stand vs. high auto excise taxes image

Tito F. Hermoso / Anton Andres, Jenna V. Genio, Senate of the Philippines | June 19, 2017 13:12

Our last attempt to forestall the new auto excise taxes

The last stand

Keeping things clear, we fully support the Duterte administration's push for the golden age of infrastructure, be it several trillion Pesos over the next 5 years. We believe in the integrity and abilities of the Economic triumvirate of Dominguez [DoF], Pernea [NEDA] and Diokno [DBM]. We also support the noble and painful objective of the DoF's Comprehensive Tax Reform Program [CTRP] and whatever else it is called Tax Reform for Acceleration and Inclusion [TRAIN as of June 2017] after going through several legislative grinders. First as HB 4774, then stretched and squeezed a bit to HB 5636, it is now being deliberated at the Senate and as expected, the DoF would like to maximize revenue and minimize the time to achieve it by sticking to its original CTRP.

We oppose

We reiterate our opposition to the CTRP and its current metamorphoses to two House Bills, on the following grounds:

  1. The revenue targets of several trillion to finance infrastructure over 5 years are too high and are beyond the “absorptive” capacity of the factors of production of the economy.

  2. The increase in income due to reduction in personal income taxes will be negated and neutralized by rising consumer goods prices because of the staged increase in excise taxes on fuels.

  3. The tax revenue due to the proposed higher auto excise taxes will not be realized, despite generous financing schemes by the banks, because the overall per unit sales will decrease, due to much higher prices. Moreover, the proposed taxes will zero out sales of the luxury cars, resulting in no tax revenue.

  4. The whole approach of regressive taxation [as opposed to single rate or flat tax] is to place a bigger burden on the rich never translated to higher aggregate revenues as the rich will always find more reasonable tax havens for their consumption and income recording. Compare the fast growing economies of Hong Kong and China [lightly taxed, flat rate] versus the champions of regressive taxation – all the “boom and bust” unstable economies of Latin America - and one needs no more graphic a lesson as to regressive taxation's failure for budding economies.

  5. A combination of the above price rises to due to the CTRP will drastically reduce car sales and hence the network of car dealerships which are all heavily indebted.

We propose

  1. While the Infrastructure thrust to rely less on PPP and more on ODA, plus the cheaper construction costs by lowest bidder via Government appropriation, is laudable, it doesn't follow the Duterte administration promise of reducing wasted time, red tape and temptations for corruption due to rigged biddings. Moreover, this preference forces the DoF to dream impossibly high revenue targets because the government not only needs to finance the government appropriation but also service the debt for the ODA, regardless if DBM Secy. Diokno says it wouldn't be more than 20% of total budget. We suggest that the Senate require the DoF to increase the proportion of infrastructure financed by PPP, streamline the PPP vetting process [enforce automatic franchise to bid winner instead of coursing to Congress] and cancel [which Secy Dominguez already did] the previous administration's extortionate PPP franchise fee. This will reduce the need to raise taxes to as proposed in the CTRP. Moreover, with the PPP, the government can tap the efficiency and speed of the private sector, along with its financial muscle. The Private sector can easily make up for 60% of the targeted budget for infrastructure so long as the PPP is properly incentivized.

  2. With lowered target revenues for the financing infrastructure in number 1 above, the Senate can now enjoin the DoF to remove the regressive high rate of taxation [35.0%] for the high income rackets capping at 30.0% as the highest personal income tax rate. All the CTRP tax rates and schedules to remain as proposed.

  3. Aligned with number 2 above, the top rate of auto excise tax can stay at a maximum 4.0% and the highest tier, the 3rd tier, capped at 100.0% in excess of 2.1 M net manufacturers price. All other CTRP proposed tax rates and schedules to remain the same.

  4. Maintain the 2017 to 2020 staggered fuel tax increase under the latest TRAIN tax schedule as this has greatly reduced the burden on the public as compared to the original CTRP.

The Senate: the last stand vs. high auto excise taxes 

We ask the Senate to ask too

We expect the DoF tax framers of the CTRP to fight all the above tooth and nail, and we are ready to show them our own forecasts and assumptions specially on how much auto unit sales will fall. In the interest of transparency, the DoF should also make public the following data so that the Public and the Senate can compare and study:

  • Total actual tax revenue, 2016, auto excise tax, per tax tier along with total actual unit sales per tier

  • Total targeted tax revenue 2018, auto excise tax, per tier, along with forecast sales per tier

  • Maximum targeted infrastructure budget – 2018 to 2020

  • Minimum targeted infrastructure budget – 2018 to 2020 [to arrive at proportion to be financed by PPP].

Is there a back up plan at all?

Also, the Senate should ask the DoF to produce fall back option action plans in case one or both of the following happen in 2018 – a drastic 40% drop in unit auto sales vis-a-vis 2016 total sales and an economic slow down – a 2.0 to 3.0% drop in the NEDA targeted 8.0% annual growth rate due to rising consumer prices.

Better to delay than to rush and fail 

We believe that for the Nation to swallow and support the CTRP, the aforecited vital data, forecasts and assumptions be made public and that the DoF should have a back up plan in case their projections and forecasts fail. The Senate is the last bastion for all this to be threshed out. It should do so now and if it means telling the DoF to go back to the drawing board, then it must. Even if the nation can no longer wait for the Golden Age of Infrastructure, it is better for us to delay in crafting a realistic and achievable CTRP rather than rush this pie-in-the-sky dream scenario that is doomed to utter failure, causing unnecessary business collapses and loan defaults.