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Assessing the Impact of the Philippine Sin Tax Reform Law on the Assessing the Impact of the Philippine Sin Tax Reform Law on the Demand for Cigarettes

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Considered landmark legislation, the law addressed longstanding structural weaknesses in the state's tobacco tax system. The health and economic consequences of tobacco use have been a long-standing political concern in the Philippines, as the country is one of the largest consumers of tobacco in the Western Pacific region (Quimbo et al, 2012). After nearly five (5) years of implementation, what has been the impact of the Sin Tax Reform Act on cigarette demand.

This study aims to: (i) analyze the regulatory environment that affects the demand for and supply of tobacco products in the country; (ii) to estimate the price and income elasticities of demand for cigarettes after the tax reform; (iii) to determine the impact of the tax reform on cigarette consumption; (iv) to determine the impact of the tax reform on the price responsiveness of the demand for cigarettes;. First, to our knowledge, this is the first analysis to empirically evaluate the impact of the tax reform on cigarette demand in the Philippines after the policy reform was implemented from 2013. Second, it is the first study on the demand for cigarettes in the country that used a two-part estimation strategy, which separately estimates the components of the total price elasticities, namely the price elasticity of smoking prevalence and the price elasticity of smoking intensity, both of which are key parameters in the assessment of the impact of the policy reform.

By 2015, locally manufactured cigarettes accounted for 61.5% of the total excise duty collection in the country. Tobacco production in the country is expected to decrease as a result of the tax reform. Because of the adverse health and economic consequences of tobacco consumption, several studies in both developed and developing economies have empirically examined the magnitude of the impact of increases in the price of tobacco products on smoking, including the effectiveness of increasing tobacco taxes as part of tobacco control. strategy.

Using survey data and logistic regression analysis, Scollo et al. 2003) found that of the 2.4% decline in smoking prevalence during the NTC period, at least two-thirds was due to the impact of the tax reform.

Figure 1. Excise tax collections from locally manufactured cigarettes, 2001-2015
Figure 1. Excise tax collections from locally manufactured cigarettes, 2001-2015

Theoretical Framework

The National Tobacco Campaign (NTC), which started in June 1997, is "the most intense and longest-running anti-tobacco campaign ever seen" in Australia (Hill and Carroll, 2003, p.ii9). This also implies that the demand for tobacco products does not respond to changes in price, and is therefore perfectly price inelastic (U.S. Department of Health and Human Services, 2000). In the late 1980s, however, forward-looking rational dependence models emerged as an improvement on backward-looking models.

According to myopic models of tobacco demand, although the conventional law of demand exists—that is, an increase (decrease) in price will decrease (increase) consumption, holding everything else constant—the effect of the price increase will be much smaller. than the effect of any price reduction (Scollo and Winstanley, 2017). The rational framework of addiction formally developed by Gary Becker and Kevin Murphy in 1988 is arguably the most influential model of addictive behavior especially in the late 1980s and 1990s (IARC, 2011). According to the rational addiction framework, individuals are assumed to have stable preferences and may rationally decide to engage in an addictive behavior, such as smoking, as this maximizes their lifetime utility (Becker and Murphy, 1988). .

The rational dependence model has important implications that also provide theoretical support for our model specification. Another drawback of the rational dependence framework, which gave rise to imperfectly rational dependence models, is that it uses exponential discounting to capture the fact that smokers value current consumption more than future consumption.

Data and Methodology

We also control for the household's family size and the urbanity of the household's regional location. To account for the potential endogeneity of the price variable due to the self-reported nature of the price data as well as measurement/reporting error, we use 2SLS and two-stage efficient GMM estimation with regional fixed effects as instruments. The first stage is usually modeled using non-linear probability models such as logit and probit specifications due to the binary nature of the first decision.

Known as the Heckit model, this approach corrects for the self-selection problem in the second phase of the two-part model by including the inverse mills ratio as an additional variable in the second equation. Impact evaluation studies typically use two cross-sectional data sets, collected before and after the event occurs, to determine the effect on economic outcomes. The implementation of the 2012 tax reform allows us to use a natural experimental approach in measuring the law's causal impact on tobacco demand.

Similar to the approach of Callison and Kaestner (2012) and Kiel and McClain (1995), we construct a two-year independent pooled cross-section of the 2009 and 2015 FIES. The equation of interest in measuring the causal impact of the sin tax reform law in 2012 is given by. In Equation (11), the parameter of interest is C, the coefficient of the interaction between the year dummy variable 15 and the treatment variable E.

This is a DID estimator that measures the causal effect of sin tax law reform on cigarette consumption. In the literature on natural experiments, the parameter C is often called the average treatment effect because it measures the effect of a treatment or policy on average outcomes. This policy parameter plays a key role in determining the effectiveness of the 2012 sin tax law reform in reducing household cigarette consumption.

Another important question that we uncover in our empirical analysis involves the impact of the 2012 sin tax law reform on the response of cigarette consumption to changes in cigarette prices. The year dummy variable 15 captures tobacco control measures other than the sin tax reform implemented over the seven-year period.11 This is a necessary step to isolate the impact of the reform. The parameter of interest is C, the coefficient of the interaction between the year dummy 15 and the price variable log.

Results and Discussion

This increase in the elasticity of demand for cigarettes can be attributed to several factors, such as the permanent rise in cigarette prices due to the significant rise in excise taxes brought about by the reform (we are formally evaluating the impact of the sin tax. Notes: We test for endogeneity of the cigarette price variable for the total sample and any four sub-samples, and find that the zero of exogeneity is rejected An important step in this exercise is to check whether selecting only households with positive cigarette consumption in the regressions biases of the sample selection.17 Table 7 presents the estimates of the Heckman model, indicating that the estimated inverse mills ratio in column (1) is statistically significant and positive.

In Table 8, we present estimates of prevalence and intensity of elasticity as average marginal effects of the two-part estimation technique. The results reveal that the elasticity of smoking intensity dominates the elasticity of smoking prevalence, suggesting that of the total demand effect of cigarette price increases, it is the reduction in smokers' consumption (smoking intensity) that accounts for a large portion of the reduction in cigarettes. of cigarette consumption and not a deterioration in the number of cigarette users (smoking prevalence). Notes: Column (1) shows the ratio of mills, while columns (2) and (3) present the structural and selection equation estimates, respectively.

To quantitatively estimate the impact of sin tax law reform on cigarette demand, we construct an independently pooled cross-sectional data set that covers the period before and after the sin tax reform law. In Tables 9-11, we present the results of the impact of the sin tax law reform on cigarette consumption and the elasticities of demand for cigarettes. In our DID model, the DID parameter CJ (dummy 2015 X dummy treat in Table 9) is statistically significant and negative, providing strong evidence that the reform has been effective in reducing household cigarette consumption, accounting for up to 70% of current consumption. decline in cigarette consumption from 2009 to 2015.

By breaking down the impact of the sin tax law reform on its effect on smoking prevalence and intensity, our empirical exercise reveals that the impact on smoking intensity is significantly larger than on smoking prevalence (Table 11). This is expected due to the addictive nature of cigarettes, which reduces the impact of the reform on smokers' decision to quit. The main contribution of our study is the analysis of the impact of the sin tax reform.

Since the law pegged the increase at 4 percent per year, this particular provision of the law requires amendment to ensure that the increase in excise duty will not be lower than the current rate of inflation. Second, the relatively inelastic demand for cigarettes and the dominance of the elasticity of smoking intensity over the elasticity of smoking incidence support the evidence of the addictive nature of cigarette smoking. Finally, although not directly related to our findings, a periodic review of the implementation of the non-price tobacco control measures should be undertaken to increase their effectiveness in reducing tobacco consumption in the country.

In terms of assessing the impact of the sin tax reform, our empirical exercise has not yet taken into account the change in the affordability of cigarettes over the period. A more nuanced analysis would involve a simultaneous evaluation of the impact of the reform on cigarette consumption and cigarette affordability. Source: Authors' calculations using data from Survey of Retail Prices of Commodities for Generation of the Consumer Price Index (CPI), Family Income and Expenditure Survey (FIES), both provided by the Philippine Statistics Authority (PSA) and Euromonitor International.

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Figure 4: Household expenditures on tobacco products (%)
Figure 4: Household expenditures on tobacco products (%)

Pigura

Figure 1. Excise tax collections from locally manufactured cigarettes, 2001-2015
Figure 3.  Volume of cigarette removals (million packs), 2001-2015
Figure 4: Household expenditures on tobacco products (%)
Figure 6: Average annual cigarette consumption of households by income decile (number  of packs)
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