While imposing taxes can, in principle, reduce public health risks, curb tobacco use, and generate revenue, overdoing it can backfire and create dire, unintended consequences, an Australian expert said.
“The Australian and Philippine governments have pulled the taxation lever too far and unbalanced the market. The annual tax rate increases mandated in both our countries have resulted in declining government revenues, are undermining tobacco control measures, and are fueling organized crime,” said Rohan Pike, an investigative consultant with 25 years of police and customs experience at the Australian Federal Police and the Australian Border Force.
Pike was one of the resource persons during the recent hearing on House Bill 11360, which seeks to curb illicit trade in cigarettes and tobacco products, held by the Senate Committee on Ways and Means chaired by Senator Sherwin Gatchalian.
Pike has led successful and high-profile international cases against fraud, trade crime, foreign bribery, corruption, and money laundering. He has provided advice on fighting illicit trade to the governments of Australia, Papua New Guinea, Timor Leste, and Pakistan, among others. He helped the Australian Retailers Association establish Australians to Stop Counterfeiting and Piracy (AUSCAP), a coalition of industry groups, businesses, and trademark owners dedicated to stopping illegal trade.
Australia has one of the most restrictive tobacco and vaping policies in the developed world. “Since 2010, our government has raised excise taxes on tobacco by 800 percent. As a result, a pack of legal cigarettes in Australia now costs three times more than a pack of illicit cigarettes,” said Pike.
Unfortunately, the huge price disparity between legal and illicit cigarettes is fueling the black market. Pike revealed that Australia’s excise tax collections dropped precipitously from $16.3 billion in 2020 to just $7.4 billion—a 55 percent decrease in just five years.
In the past two years, Pike said over 200 arson attacks on shops and warehouses tied to illegal tobacco have occurred in his home state of Victoria. An unprecedented spate of homicides, kidnappings, extortion, armed robberies of legal tobacco, and arson attacks has been perpetrated by criminal gangs fighting over the huge profits generated by the lucrative illicit tobacco and vapes black market.
“Australia’s policy mistakes should be a flashing red light for Philippine regulators. We’ve seen the chaos that follows when taxation overshoots its mark.”
In the Philippines, the telltale signs are becoming evident. A pack of smuggled cigarettes currently costs as low as P40, which is almost three and a half times cheaper than a pack of legal cigarettes that retails for around P140. After increasing substantially in the first few years after the enactment of the landmark Sin Tax Law, the Philippine government’s excise tax collections have declined sharply. Collections decreased from P176 billion in 2021 to P160 billion in 2022 and further to P135 billion in 2023. In 2024, collections dropped further to P134 billion.
Pike suspects that the price disparity between legal and illicit cigarettes is attracting new smokers and driving the black market in the country. Information presented during a previous hearing revealed that adult smoking rates in the Philippines surged from 18.5 percent in 2021 to 23.2 percent in 2023 after plateauing for nearly a decade.
Local e-cigarette industry representatives present during the hearing estimated that illicit vaping products account for up to 80 percent of the market in the Philippines. Pike said Australia has a worse situation because of the government’s failed policy. “Australia has seen illicit cigarette sales surge to over 40% and illicit vape sales to over 95%—and that’s after a huge increase in law enforcement funding and focus.”
Counter approach
He recommended a three-pronged approach to counter illicit trade in tobacco and vaping products in the Philippines.
“The Philippines has the chance to get this right by adopting a proportionate, evidence-based approach. Doing so can reduce smoking, stabilize revenues, and keep its citizens safer and healthier,” Pike said.
First, set an appropriate tax rate to suppress the key driver of illicit trade. Pike said the revenue returns for both Australia and the Philippines have followed a classic “Laffer Curve” response in which the sweet spot where the excise rate for tobacco maximized revenue returns was reached some years ago. “Economic theory shows that further tax increases will not increase revenues, it will only accelerate the decline. Both of our governments have misread the effect the explosion of the illicit market would have on returns.”
Second, strengthen enforcement and prosecution. “Australia and the Philippines face similar difficulties in protecting borders, as both countries have vast coastlines with many remote locations that serve as windows for illicit products. Moreover, the Philippines is located in the middle of several countries that are key sources of illicit tobacco, including China, Cambodia, Vietnam, and Indonesia,” Pike said.
He noted that House Bill 11360 includes some welcome enhancements for law enforcement. “But the greatest help you could provide [law enforcement agencies] is to freeze or reduce the excise rate, thereby suppressing the key driver of illicit trade. Prevention is always better than the cure,” he said.
Third, consider tobacco harm reduction strategies. Pike recommends incentivizing reduced-risk nicotine alternatives including vapes through proportionate tax measures combined with education campaigns.
