By Timothy S. Donahue
Top Takeaways:
- Economic warning: Economist Arthur Laffer says repeated tobacco excise tax increases in the Philippines are reducing government revenue and fueling illicit cigarette sales.
- Revenue trend: Philippine tobacco excise collections peaked at ₱176 billion in 2021, then declined to ₱134 billion in 2024, despite continued annual tax increases.
- Smoke-free proposal: Laffer called for lower tax rates on smoke-free nicotine products, arguing that they should be treated differently from combustible cigarettes.
American economist Arthur Laffer says the Philippines may have reached the point where higher tobacco taxes are yielding diminishing fiscal returns, stating that continued excise increases are reducing government revenue and expanding the illicit cigarette market.
Laffer, founder and chairman of Laffer Associates and the economist known for developing the Laffer Curve, said that Philippine excise tax collections indicate the country’s tobacco tax policy has moved beyond the revenue-maximizing point envisioned by economic theory.
“The data strongly suggest that the Philippines has gone too far in increasing tobacco tax rates. If you overtax a product, you lose control of the market, you lose revenues, and you have more people buying illicit cigarettes,” Laffer said.
The Philippines has steadily increased tobacco excise taxes through a series of tax reforms, including the Sin Tax Reform Law of 2012, the Tax Reform for Acceleration and Inclusion (TRAIN) Act of 2017, and the Tobacco Tax Law of 2019. These measures imposed annual increases of ₱5 ($0.81) per pack of cigarettes through 2023, followed by a permanent 5% annual increase starting in 2024.
Government figures cited by Laffer show tobacco excise collections rose from ₱126 billion ($2.04 billion) in 2017 to a record ₱176 billion in 2021, then declined to ₱160 billion in 2022, ₱135 billion in 2023, and ₱134 billion in 2024, despite continued tax increases.
Laffer also cited research from the University of Asia and the Pacific, which estimated that illicit cigarette sales have maintained a double-digit share of the Philippine market for more than a decade. The study estimated that illicit trade resulted in approximately ₱22 billion in foregone tax revenue and ₱84 billion in lost product value, while broader economic losses in 2022 exceeded ₱118 billion in output.
Drawing comparisons with Ireland and Singapore, Laffer argued that both countries saw tobacco tax revenues decline after substantial excise increases and later moderated their tax policies as illicit trade expanded.
Looking ahead, Laffer urged Philippine policymakers to adopt what he described as a more data-driven approach to tobacco taxation, balancing revenue generation with public health objectives.
“The Philippine government should adopt data-driven taxation policies that strike a balance between fiscal sustainability and public health goals,” he said. “Find that sweet spot where you have just the right taxation, you discourage as many smokers as possible without losing them to illicit tobacco, and you collect revenues to implement tobacco control programs.”
Laffer also recommended keeping tax rates lower for smoke-free nicotine products, including heated tobacco products, arguing that differentiated taxation could encourage adult smokers who are unable or unwilling to quit nicotine to switch to alternatives that many public health authorities consider less harmful than combustible cigarettes.
While Laffer’s analysis reflects one economic perspective, public health organizations, including the World Health Organization, argue that higher tobacco taxes remain among the most effective measures to reduce smoking prevalence and improve population health.
