Dealing with unintended consequences

IIIJAOYINGIII-PIXABAY

If memory serves me, the Philippines collects about P125 billion in annual revenues from fuel, in the form of excise and value-added taxes on oil and fuel products. It collects roughly the same amount from excise taxes on tobacco products and electronic cigarettes. And then maybe another P100 billion in excise tax on alcohol products. All told, these three taxes account for almost P300 billion in revenues every year, or roughly about 5% of the national budget for 2024.

Comes now the electronic era, the Digital Age, with motor vehicles running on internal combustion engines (ICE) being replaced by electric vehicles (EVs), and young smokers turning to electronic smoking devices such as heated tobacco and vapor products, also known as vape. There is no electronic alternative to liquor and beer to date. But just the same, in the long run, this “shift” to modern-day products can impact excise tax collection significantly.

On the positive side, tobacco alternatives are also taxed and account for over P500 million in revenues yearly. This covers excise taxes on heated tobacco and other vapor products, including all types of smoking devices and vaping products. As for fuel taxes, the shift to electric vehicles will most likely leave a big hole in government pockets. Add to this the fact that excise taxes on EVs are suspended until 2028, while hybrid vehicles are taxed only half the usual rate charged gas- or diesel-fed vehicles.

And this is where policy planning and regulatory calibration becomes more crucial. The obvious challenge for the Finance department is to source the revenues required to support the national budget of over P5 trillion for 2024, and then the succeeding years. And with prospects of declining excise tax revenues until 2028 at least, and the commitment to levy new taxes only as a last resort, then the pressure is truly on for fiscal planners.

Borrowing is not much of an option in the sense that any new debt today is surely a new tax tomorrow. After all, financing is available only to those willing to commit future revenues as debt payments. Even during a low-inflation and low-interest rate era, large deficits can be addressed only by a significant expansion in economic output and a consistently high rate of long-term economic growth. This is highly unlikely for any country, given the global boom-bust cycle.

Excise taxes are imposed for two major reasons: to generate revenues for the government; and, to address negative externalities or bad effects on society in general. For instance, cigarettes are taxed high to discourage people from smoking as the habit has negative effects on health. It also has public health costs implications when the state subsidizes the treatment of people with smoking-related illnesses. The same can be said for the environmental impact of oil use, and the health implications of emissions from motor vehicles using fossil fuel.

In the case of cigarettes and alcohol products, so-called “sin” products, rising excise taxes over the years have never really deterred consumption. Millions of people continue to smoke and drink alcohol. And many continue to die yearly from smoking- and alcohol-related illnesses, despite taxes and public health warnings. In the case of cigarette smoking, electronic alternatives have even emerged.

In terms of taxes, these electronic smoking devices have become a new source of government revenues, and somewhat make up for whatever taxes are being lost as smokers shift away from regular cigarettes and tobacco products and turn to digital vices. But in the case of EVs, with the suspension of excise taxes on electric vehicles, and the possibly dwindling consumption of fossil fuel over time, excise taxes might be eroding.

In the case of New Jersey, Governor Phil Murphy imposed an annual road tax of $250 on all EV owners, supposedly to offset the state’s loss in fuel tax revenue. The fee will go up by $10 every year until it hits $290 in 2028. And not unlike the Philippines, New Jersey now requires buyers and lessees of all new vehicles to advance four years in registration fees, including the new EV fee. Locally, we advance three years in registration fees for all new cars sold.

Some quarters see this high initial cost of EV ownership as a deterrent to the shift to EVs, particularly in New Jersey, especially given the fact that the new tax makes the cost of EV ownership even higher than that of comparable gasoline-fed motor vehicles. In addition, the state is also phasing out the sales tax exemption previously given to EVs. This is considering that New Jersey has been among the leaders in EV transition in recent years.

But the more important consideration, according to those opposed to the new EV tax, is that the annual EV fee of $250 is way beyond the potential losses from lower collections of fuel excise tax which are an average of $100 a year for popular car models sold in the state. In short, if the EV tax is intended to make up for lost revenues from fuel taxes, it should be at a level commensurate to the projected loss. Moreover, fuel is subject to excise but not sales tax in New Jersey, but electricity sold to EV owners for charging their cars is subject to a sales tax.

One can suspect that New Jersey imposed the EV tax to favor manufacturers of vehicles with internal combustion engines. However, many EV makers — perhaps other than Tesla — also produce hybrid vehicles. So, while the EV tax may skew the market towards ICE products in New Jersey, it may not necessarily be a significant benefit for ICE makers. But it can boost New Jersey tax collection as the state slowly moves towards going “green” by 2035.

New Jersey appears to be going overboard with its policy calibration, which may have its own set of unintended consequences. But I do believe there are lessons to be learned from its new initiative. With respect to EVs, fuel, and tobacco products, we need to be realistic about potential losses and start looking at ways to address them.

A balanced, wholistic, but practical approach may be necessary at this point, with today’s policies and regulations requiring “counterparts” that address unintended consequences in the future. Policy makers should thoroughly review these consequences through future scenarios, so they can also work on long-term mitigations.

Or, we can just bury our heads in the sand, wish our problems away, and hope for the best. Anyway, the present generation may not live long enough to suffer these consequences, and the future generation can always do the worrying about tomorrow. Policies and regulations as well as political decisions can therefore keep to their present cycle of six years.

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council.

matort@yahoo.com