Rewriting the changes in the sin taxes ? II | Per Se

Core
Business World, 24 October 2012

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I have written extensively on why earmarking of funds is a bad idea. Earmarking has not worked, here and abroad. It ties the hands of the Executive Department in allocating future budgets wisely and effectively. It limits the ability of fiscal managers to address large budget deficits and, possibly, fiscal crises in the future. Moreover, the proposed disposition of proceeds ? heavy on curative care and less on preventive care ? may not be what DoH authorities want.

Hence, if I were to rewrite the proposed changes in the sin tax system, I would delete the section on the Disposition of Excise Tax Collections from Alcohol and Tobacco Products.

If the proposed Senate bill were passed in its present form, a big chunk of public funds, a total of around 100 billion and rising, would be earmarked for curative (PhilHealth, regional hospitals and local government sponsored-hospitals) rather than preventive health care.

It will tie the hands not of the Aquino administration but also future administrations, a move that is neither sound nor smart.

Earmarking could result in fund imbalances ? a surplus for the favored programs and shortage for other budget items. This could complicate decision-making on the composition and size of the budget.

What if fiscal authorities had to cut spending in order to reduce its ballooning budget deficit, but they are barred from touching the earmarked funds for the health sector? Even as the budget deficit is threatening to reach unmanageable levels, the subsidy to tobacco growers and workers will continue to expand, the surplus of PhilHealth will continue to swell, and new hospital buildings or extensions will continue to be built.

No one can predict the future with certainty. Many things could go wrong. Debt servicing could soar once the world economy recovers and interest rates increase. The retirement bill of the military and the police is a major fiscal risk in the near future. Tax revenues fluctuate with economic growth, which suggests that a slowing economy may result to lower revenues. All these suggest that a fiscal catastrophe cannot be ruled out in the future.

I doubt whether Budget Secretary Abad and Finance Secretary Purisima even agreed with the earmarking provision in the proposed sin tax amendments. If not, they should speak up. Otherwise, they, and their future successors, will be serious disadvantaged in doing their respective duties.

Public health sector is underfunded

Don?t get me wrong. I agree that the public health sector is underfunded. But I disagree with the earmarking of the proceeds of taxes on cigarettes and liquor ? mostly for curative rather than preventive health care. An enormous amount of money now and the future for hospitals, both in the regions and in local government units (LGUs). The later is the responsibility of the LGUs under the Local Government Code of 1991.

If we want to raise the resources going to DoH and PhilHealth, let us do it the right way. Do it through direct budget appropriation not as a rider in a tax bill. Taxation is the responsibility of Congress through the committees on ways and means of both houses of Congress. Budgeting, on the other hand, is the joint responsibility of the President and Congress.

Taxation is about generating resources, budgeting is about allocating resources according to the priorities and goals of the government of the day. Don?t mix the two. Worse, don?t tie the hands of future governments.

A superior alternative to earmarking is the preparation of a multi-year Health Sector Expenditure Framework (HSEF) for 2014-2016. As soon as the additional sin tax bill is passed and a firm estimate of how much incremental revenues the new tax would generate, the Department of Health, in consultation with the Department of Budget and Management, should prepare an HSEF. The framework should spell out what the present administration wants to do for the rest of its term ? its sector goals and priorities, specific programs, resources needed for each program, and expected outputs and outcomes.

The HSEF should also include an adjustment mechanism in the event that resources fall short of planned levels or there is need to reduce the ballooning deficit.

But for the HSEF for 2014-2016 to be binding, it should be submitted by the President to Congress. It should not be an internal document known only to DoH and DBM. In turn, Congress, after a careful scrutiny, should approve the same through a joint Budget Resolution.

The difference between the two approaches is huge. By adopting the HSEF, the priorities are defined by DoH authorities, not by politicians. As a result, there will be a closer match between what DoH authorities want and what they will get.

As a result, odds will improve that less money will be spent for new construction of hospitals or hospital wings, and more money for preventive health care. And the likelihood that the large and rising surplus of PhilHealth would continue to swell might be avoided. That risk exists as the Senate bill proposes that ?40% if the total excise tax collection from alcohol and tobacco products? should be directly remitted to PhilHealth.

But PhilHealth is already sitting on a huge surplus. In a recent Senate hearing, Senator Franklin Drilon, chairman of the Senate finance committee, found out that PhilHealth was sitting on an estimated 90.7-billion reserve fund as of July this year. Yet, what is required by law is that the reserves be equivalent to two years worth of compensable fees, or roughly 30 billion.

The preparation of the HESF is a better way of allocating limited public funds than the earmarking provision in the sin tax bill. It is more transparent, more responsive, and less restrictive of the choices of future Presidents and Congresses.

Source: http://www.econ.upd.edu.ph/perse/?p=1707

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