The proposed adjustments to the oil excise tax under the tax reform bill aim to stop subsidies on the fuel consumption of rich households and channel instead such would-be savings to the government’s unprecedented infrastructure program that would create more jobs, boost productivity and sustain high growth, Department of Finance (DOF) officials said Wednesday.

Finance Undersecretary Karl Kendrick Chua said at a hearing of the House ways and means committee that adjusting fuel excise taxes and indexing these to inflation from hereon are expect to raise incremental revenues (relative to 2016) of P807.4 billion over the medium term, of which P36.1 billion will be collected in the second half of 2017, P120.9 billion in 2018, P147.2 billion in 2019, P156.9 billion in 2020, P167.6 billion in 2021, and P178.7 billion in 2022.

This is assuming, he said, that both the House and the Senate act soon enough on the DOF-proposed first package of the Comprehensive Tax Reform Program (CTRP), which is contained in House Bill No. 4774 that was filed last week by House ways and means panel head Rep. Dakila Carlo Cua.

“This is a highly progressive tax because we would be removing subsidies on the fuel consumption of the top 10 percent of households with monthly incomes of around P115,000 and above who consume almost 51 percent of fuel in the country,” Chua told lawmakers at this week’s resumption of the House ways and means committee hearings on HB 4774.

Chua also pointed out that the top one percent of households, with monthly income of around P293,000 each, account for around 13 percent of the fuel consumption in the country.

He said that rather than indirectly subsidizing the rich, the additional revenues to be collected from the fuel excise increase would be better spent on targeted transfer programs for about 10 million poor and vulnerable households that would be affected by the tax hike and earmarked for infrastructure projects to reduce traffic congestion and pollution and raise workers’ productivity.

“Lower-income households will see a minimal increase in excise tax payments compared to richer households. In particular, the lowest 10 percent of households will see a P160 increase in excise tax payments per year, while the richest 10 percent will see a P4,316 increase annually. This is an indicator of a highly progressive tax,” Chua said.

According to Chua, diesel, kerosene, and liquefied petroleum gas (LPG) have been exempt from the excise tax since 2005 and were taxed at low rates of around P1.63 per liter between 1997 and 2004, while gasoline has been taxed at only P4.35 per liter for the past two decades.

“The latest data from the Land Transportation Office (LTO) show that 72 percent of newly registered sport utility vehicles (SUVs) were diesel- powered in 2013. The rich are taking advantage of this diesel exemption, and today, more than 90 percent of new SUVs sold are diesel powered,” Chua said.

He said the adjustments under the Cua bill would be staggered both for diesel and gasoline and other petroleum products from 2017 to 2019.

From 2020 onwards, the taxes would be indexed by 4 percent to account for inflation, he added.

“Under the bill, there shall be no increase or indexation for the year if the average Dubai crude oil price in the month preceding the scheduled indexation exceeds 100 US dollars per barrel,” Chua said.

Chua said recent history has showed that the domestic economy would be able to weather these tax adjustments.

He recalled, for instance, the introduction of the Reformed Value Added Tax (RVAT) in 2005 and the global oil price shock of 2011, which had both significantly raised fuel prices.

As expected, during the RVAT reform, GDP growth fell a bit from 6.7 percent in 2004 to 4.8 percent in 2005, the year that the tax was implemented. But the economy recovered in 2006 with GDP expanding to 5.2 percent.

“For some time, consumption slowed down, and inflation increased, but the economy did not collapse and inflation was manageable. In fact, the economy remained resilient, which created more opportunities for the fast growth that we have been experiencing for the past 10 years,” Chua said.

The country’s experience during the oil price shock was similar, with GDP growth dropping from 7.6 percent in 2010 to 3.7 percent in 2011, but recovering at 6.7 percent in 2012, even when the price of Dubai crude was at $109 per barrel.

“Despite concerns raised by the industry that higher taxes or higher prices could lead to lower economic growth and skyrocketing inflation, historical data show that the country’s economy weathered the shocks quite well, even despite the relatively poorer shape it was in prior to these shocks,” he said. “Today, with a much stronger economy, our country can easily withstand the increase.”

Cua’s HB 4774 covers the lowering of personal income tax (PIT) rates and a corresponding set of revenue-compensating measures, including lowering the rates for estate and donor’s taxes, expanding the value-added tax (VAT) base, but retaining the exemptions enjoyed by senior citizens and persons with disabilities, adjusting automobile and fuel excise taxes.

Complementary reforms being considered by Congress to this revised tax package include introducing a sugar-sweetened beverage tax, indexing the motor vehicle user’s charge to inflation, and granting an amnesty to past estate tax cases.

Moreover, the revised plan also includes legislated administrative reforms in the Bureaus of Internal Revenue (BIR) and of Customs (BOC) such as the adoption of a fuel marking and monitoring system to prevent smuggling and not only to collect the correct taxes but also to ensure that only high-quality petroleum products are sold in the market; the use of e-receipts; the mandatory link of the point-of-sale (POS) systems of establishments directly to the BIR; and the relaxation of bank secrecy laws for investigating and combating tax fraud.

Finance Secretary Carlos Dominguez III said that “in the medium-term, tax reform is expected to help reduce the poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,550 in 2015 to at least $4,900 by 2022, close to where Thailand is today.”

Once this momentum is sustained, the country would be well on its way to becoming a high-income economy by 2040 with a per capita gross national income of a least $11,000, which is where Malaysia is right now, he added.

In HB 4774’s explanatory note, Rep. Cua said “to realize these aspirations, the Duterte administration recognizes the need to sustain high growth of at least seven percent every year for one generation, shift the source of growth from consumption to investment, and heavily invest in our people through improved social services, such as public health and education systems, and in better infrastructure to improve connectivity and raise productivity.”

Rep. Cua likewise said that today’s window of opportunity “characterized by strong macroeconomic fundamentals, global recognition for the success of the country, and a popular new government provides the necessary condition” to realize these plans of President Duterte for the country.