Text Tax: An IMF Imposition That Could Blow in Arroyo's Face

MANILA - As expected, the revived proposal to impose a tax on text messaging is generating controversy and broad opposition. What surprised some people perhaps are the strong statements from telecommunication companies (telcos). They called the plan "anti-poor," "oppressive" and "one of the worst anti-consumer legislations ever made."

Telcos, of course, are still reeling from the public relations beating they have been receiving stemming from their questionable charges, missing load and other abuses, which was the subject of a Senate probe. Thus, some surmise that telecommunication companies are strongly opposing the text tax to recover some publicity points by taking on an issue their customers are strongly opposed to. But Globe Telecom and Smart Communications are actually defending their business interests, which are being threatened by the text tax proposal. Specifically, the proposed tax would affect their promotional bucket-priced short message service (SMS) plans that allow them to protect their market share and earn billions of pesos in profits.

Broad Opposition

Nonetheless, the firm position of Globe and Smart against the text tax is a welcome development. They reinforced the broad opposition against an onerous tax proposal repeatedly raised by Congress as well as Malacañang the last seven or eight years. Members of the Senate, led by self-styled consumer advocate Senate president Juan Ponce Enrile, have also spoken strongly against the text tax. Add the 2010 elections to the equation, some say, then it is almost certain that this plan will not materialize any time soon.

But proponents of the measure are adamant. The House ways and means committee led by Quezon Rep. Danilo Suarez and Ilocos Sur Rep. Eric Singson has promised to pass a law imposing a five-centavo tax on SMS within the year. Some sort of an alternative bill is also being pushed by Sen. Richard Gordon reportedly supported by the DOF and NEDA. In Gordon's version, the text tax is in the form of a 5-year levy on telcos' profits on SMS. Malacañang has not asked its allies to drop the text tax though it set conditions for its support, namely a "no pass-on to users" provision, telcos must pay, and revenues from this must go to education, health or computerization.

IMF Pressure

The latest incarnation of the text tax (a consolidated version of Singson's House Bill 6625 and Suarez's House Resolution 282) comes in the context of an administration under pressure from the International Monetary Fund (IMF) to widen its revenue base. In its latest consultation with Philippine officials concluded last January 2009, the IMF Executive Board "suggested" that the government raises its tax collection efforts, broadens its revenue base and rationalizes fiscal incentives. The IMF noted the still high level of public debt amid continuing need for a measured fiscal stimulus, and thus raised said proposals to provide government "more scope for fiscal easing and well-targeted pro-poor cash transfers".

While no longer in debt with the IMF, the Philippines remains a hostage to it because its assessment of a country's fiscal situation is used as a signal by foreign creditors and investors. A favorable review by the IMF means a high rating for "creditworthiness" for the debt-dependent economy. The IMF has exercised control over the country's fiscal policies through regular consultations between its Executive Board and Filipino officials, such as the one they concluded in January.

Incidentally, it was the IMF that first openly pushed the text tax idea in 2002 to address the government's burgeoning budget deficit. But it was hugely unpopular and promptly rebuffed by some lawmakers. Even so, various text tax and related bills have been filed in Congress since then. Finance and Trade officials have also raised the proposal at various times and circumstances - at one point to pressure the bicameral committee to fast track the also infamous Reformed Value-Added Tax (RVAT) law in 2005 and in some instances as trial balloon on public opinion. The National Tax Research Center (NTRC) has conducted a study as well on the text tax in 2007 to weigh potential revenues and impact on consumers.

Lobby Vs. Sin Taxes

Due to its unpopularity, the text tax could not be found in official policy pronouncements of Mrs. Arroyo. In her July State of the Nation Address (SONA), for instance, Mrs. Arroyo has categorically asked Congress, to further restructure so-called "sin taxes", which unlike the text tax does not invite loud public outcry. During its January consultation with IMF officials, Arroyo officials promised to pass a law imposing separate uniform tax rates for alcoholic drinks and cigarette products.

But apparently, Malacañang and Congress have given in to the strong lobby of local manufacturers of sin products, who reportedly sought a meeting with Mrs. Arroyo in her Forbes Park (Makati) home to lobby against the proposal. The coming 2010 elections could have also played a role - with known huge election campaign contributors Lucio Tan (who owns Asia Brewery Inc and Fortune Tobacco) and Danding Cojuangco (who own San Miguel Corp) as among the stakeholders to be affected by sin taxes reform. There is also strong opposition from the so-called Northern Luzon bloc, or congressmen from the country's tobacco-producing region.

While openly asking for sin taxes reform, Mrs. Arroyo has also been discreetly pushing for a text tax law, which in March she described as having a rate of between "5 to 10 centavos" and with collections earmarked for "education". Note that these are the same salient provisions of current House proposal for a text tax. After Mrs. Arroyo's SONA, sin taxes are no longer in the agenda of the Malacañang-controlled House ways and means committee. Its chairman Antique Rep. Exequiel Javier has already declared that the text tax is more doable than the sin taxes reform.

Do we need new taxes?

For the IMF, what is important is that government be able to widen its revenue base and manage the national budget deficit, which is expected to balloon to P250 billion this year. The IMF and government hope to reduce this to P233.4 billion in 2010 through new taxes. Whether the new taxes will come from our cellphones or our beer, the intention is to assure creditors that the Philippine government, which presently has a debt of P4.23 trillion, will continue to be a viable borrower.

But do we really need new taxes when government losses from anomalous contracts in infrastructure projects alone such as the botched NBN-ZTE broadband project reaching at least P30 billion a year and nearly approximate the projected P36 billion in potential annual revenues from the text tax?

Consider also that even without modifying our existing commitments with the World Trade Organization (WTO) and other free trade deals, the Philippines can hike tariffs across the board and raise billions of pesos in revenues. Note that due to continuing trade liberalization, total collections from tariffs on imported goods and services under Arroyo now only account for 2.8 percent of total revenues and gross domestic product (GDP), compared to around 4.5 percent for most of the 1990s. In the first half of 2009 alone, we are giving up almost P117 million in potential revenues per month due to lower duties.

Government claims that revenues from the text tax will be used for education. In a policy regime of automatic debt servicing, this is lip service, to say the least. In the proposed 2010 national budget, for instance, the Arroyo administration is allocating a per capita education budget of P2,502, while each Filipino will have a debt servicing burden of P7,944. For health, Malacañang is allocating P402 for 2010 and P58 for housing. Thus, this administration, which always uses social services to defend its oppressive taxes, is allocating a combined budget for education, health and housing with an amount that is merely 37 percent of what it intends to pay its creditors.

And finally, how can a regime whose highest officials dined for $35,000 (ostensibly using taxpayers' money) in two nights during a US junket justify another onerous tax on a people already battered by high prices, low wages and job scarcity?

By the way, text tax proponent Suarez claimed to have paid for one of those dinners.