The government stands to lose billions in potential revenue unless it strengthens enforcement against the illicit tobacco trade, according to a new study that found smuggling thrives not because of high taxes, but due to weak governance and regulatory gaps.

The report, released by policy think tank Action for Economic Reforms (AER) in partnership with Johns Hopkins Bloomberg School of Public Health’s Economics for Health group, warns that proposals in Congress to lower tobacco excise taxes could undo a decade of fiscal and health gains.

The study, which surveyed more than 1,000 sari-sari stores and examined over 7,500 cigarette packs across eight major cities, showed that the southern region – particularly Zamboanga and General Santos – remains a hotspot for illicit trade. In Zamboanga City alone, 96 percent of inspected cigarette packs carried fake or missing tax stamps, while 80 percent were sold below the minimum price dictated by law.

AER Lead Researcher Daffodil Santillan said that while tobacco excise rates are uniform nationwide, illicit trade flourishes in areas where “law enforcement and regulatory oversight are weak, especially in ports and border regions.”

Revenue and policy implications

The Bureau of Internal Revenue (BIR) has relied heavily on tobacco and sin tax collections to fund Universal Health Care programs. Any rollback in tobacco taxes, AER warned, would erode public revenues while failing to address the true drivers of illicit trade.

AER called for a modernized, digital track-and-trace system for tobacco products, licensing of all retailers, and tighter coordination between Customs, the BIR and local governments in enforcement hotspots. It also urged the Philippines to strengthen regional cooperation with neighboring countries to stem smuggling at the source.

Senator Risa Hontiveros, chair of the Senate Committee on Health and Demography, said the government should “protect public health and revenues through stronger enforcement,” adding that lowering taxes at this time “may not be a good idea.”

Fiscal progress at stake

Since the enactment of the Sin Tax Reform Law in 2012, tobacco tax collections have surged while adult smoking rates dropped from nearly 30 percent in 2009 to below 20 percent in 2021. Some economists say maintaining the current tax structure is critical to sustaining both revenue and health gains.

AER warned that pending measures – such as House Bill 11360 and other proposals to cut taxes on vape and heated tobacco products – would “reward smugglers and cost lives” if enacted without proper enforcement reforms.

The full report, “Illicit Tobacco Trade in the Philippines: Findings from Sari-Sari Store Surveys and Empty Pack Audits,” was validated by the BIR and presented during a policy forum in Manila.