Economists and industry stakeholders said a more rationalized excise tax framework is crucial to reducing the burgeoning illicit trade of cigarettes and vapes in the Philippines.
The Philippine Tobacco Institute (PTI) said that reforming the current tax system would effectively curb illegal commerce, bolster government revenue and reinstate the intended impact of the Sin Tax Law.
PTI president Jericho Nograles said the government’s annual tax hike policy to reduce smoking has “failed” and led to the open sale of illicit products to minors and widespread online distribution with minimal regulation.
The PTI said illegal tobacco incidence reached a record 18.2 percent in 2024. It warned that the current structure is fueling the illicit trade of cigarettes and alternative products, jeopardizing government finances and public health.
Excise revenues have stagnated, while the illicit trade in both cigarettes and vapor products is escalating, they said.
Meanwhile, economists said the Philippines has passed the revenue-maximizing point on the Laffer Curve, where higher taxes reduce revenue. Dr. Arthur Laffer said that applying the Laffer Curve shows that excessive tax rate increases can decrease revenue by incentivizing tax evasion and the growth of the illicit market, suggesting that the Philippine tobacco excise tax rate has reached a “prohibitive range.”
Excessively high taxes act as a de facto prohibition, pushing consumers to cheaper, illegal alternatives, undermining public health goals and harming legitimate businesses, economist said.
Bureau of Internal Revenue (BIR) data show that 2023 tobacco excise tax collections reached only P134 billion, or nearly P51 billion below target. Despite higher taxes, revenue is declining as legal sales plummet, primarily due to consumers shifting to untaxed illicit products rather than quitting.
Former Senate President Franklin Drilon, author of the Sin Tax Law (Republic Act 10351), emphasized the significant problems posed by cigarette smuggling—lost government revenue for projects and Philhealth, and the undermining of public health goals to reduce smoking rates by making cheap, illegal cigarettes readily available.
Illicit products are cheaper due to the price difference between taxed and untaxed cigarettes, and in the case of counterfeit and unbranded products, the difference between genuine and illegally manufactured goods, industry groups said.
Industry data show a sharp increase in illicit cigarettes in the Philippines from 5.4 percent of the total market in 2020 to 18.2 percent last year, a 240-percent surge over four years. The PTI attributed this to the substantial price difference, with illegal cigarettes selling for as low as P40 per pack compared to around P140 for legal, tax-paid brands.
The P100 gap is driving consumers towards cheaper, unregulated alternatives, causing government revenue to fall by over P40 billion in 2024 compared to 2021.
The Department of Finance (DOF) also estimates annual revenue losses of P52 billion solely from illicit trade.
Nograles said the government should “calibrate the tax rate to an optimal level and enhance enforcement and prosecution efforts” to fully realize the benefits of the Sin Tax Law for both public health and revenue.
The illicit vape situation is similarly dire, with over P5 billion worth seized in early 2025 by the Bureau of Customs (BOC) and BIR. The root cause is a tax structure that incentivizes fraud: freebase nicotine is taxed at P6.62 per milliliter in 2025, while nicotine salt is taxed at P57.30 per milliliter, a nearly tenfold difference leading to widespread misdeclaration.
Economists Bienvenido Oplas Jr. and Dr. Arthur Laffer said the current tax rate has likely exceeded the revenue-maximizing point.
Oplas said that tobacco tax revenue peaked at P176 billion in 2021 with a P50 per pack tax rate, arguing that subsequent increases led to declines.
He said a lower tax rate could narrow the price gap between legal and illegal products, reducing the incentive for consumers to switch.
Laffer said reducing tax rates and expanding the tax base could increase overall revenue while minimizing economic damage.
In February, lawmakers passed House Bill 11360 to address vape product misdeclaration by proposing a unified tax rate of P66.15 per milliliter for all vapor products, aligning with cigarette taxes to close loopholes.
However, concerns exist that the high rate, potentially translating to P132 to P660 per pod, could further drive consumers to the illicit market.
House Bill 11360 also proposes adjusting annual excise tax increases to 2 percent in even years and 4 percent in odd years, replacing the current 5 percent automatic hike, aiming to reflect market realities and curb illicit trade while still raising revenue.
