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The budget is mightier than an excise tax suspension

“What is given by the right hand is taken by the left hand which it cannot give back.”

This adage seems to be the basis of the straightforward answer of the Department of Finance (DOF) to proposals calling for the suspension of the excise tax on oil products. The government threw a monkey wrench to the debate by announcing that the suspension could result in a P130 billion loss in tax collection. But, the Manila Mayor had an equally straightforward reaction. The suspension only involves a transfer of funds from the government to the pockets of consumers. Household incomes are expected to increase, consumers will be able to purchase products they need, and government can collect more VAT. More importantly, there is less inefficiency if reliefs were given directly through a tax cut compared to giving cash transfers that are managed by government.

I was momentarily attracted to the suspension proposal. Bringing the excise tax rates to what they were in 2018 translates to at least a P2.00 saving per liter for gasoline and diesel users. The savings would bring a significant cash relief to public utility drivers, LPG, and kerosene users. Since the suspension would only be implemented within a limited time period, the expected revenue loss would not be staggering.

But I have had a change of heart and mind after careful reflection. The benefits from an excise tax suspension would be equally enjoyed by those who are well-off. These are the owners of private motor vehicles. The tax relief can end up being regressive, with a more significant portion being enjoyed by the wealthy. There is not much sense in subsidizing fuel purchase by owners of luxury cars, such as Lamborghini and Porsche. The problem with using tax cuts as a means of subsidy is the “snatching of benefits” by unintended beneficiaries. The budget can be a better instrument for the delivery of a subsidy. Its beneficiaries can be better targeted.

An alternative that can be worth considering is the provision of discounts to users of diesel and kerosene. A reliable source informed that diesel accounts for 20% to 30% of fuel sales. A targeted subsidy minimizes government revenue loss and achieves the purpose of protecting public utility drivers and commuters. Compared to the provision of vouchers, discounts are less messy since they can be given directly at the gasoline stations to jeepney drivers and bus operators. The number of pumping stations that will administer the discount is quite manageable. It was further informed that the government had a successful experience with the discount system during the time of the late Secretary of the Department of Energy, Angelo Reyes.

As a safeguard to the system’s efficiency and transparency, discounts given by oil companies or gasoline station owners can be implemented on a reimbursement basis. They can frontload the discounts, which the government can reimburse with adequate documentary proofs. The government will be able to shoot two birds with one stone. Subsidies will be given without the need for government to frontload the cash, and an audit trail can be established for monitoring the revenues of oil companies and gasoline operators. Fraud can be detected in instances where the amount of discounts claimed by a company is hardly comparable to its cost of sales. A significant benefit is its disincentive to informal traders or those who purchase their oil products from smugglers. Since they are not part of the discount system, they will lose their customers to legitimate traders who are selling their products at a discount. This is similar to the VAT system, where consumers purchase their products from registered traders issuing official receipts.

The budget is a more effective system in helping the vulnerable. Of course, the corruption that clouds its efficiency is another story. Hopefully, the Senate investigation can provide lessons that the next government can learn from and better processes that it can implement.

 

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