The Philippines should adopt risk-proportionate taxes on nicotine products to protect government revenues, encourage smokers to shift away from cigarettes and curb illicit trade, two international economists said.

Economists Arthur Laffer and Ashok Kaul said tax policies should distinguish between combustible cigarettes and smoke-free nicotine products such as vapes, heated tobacco products and nicotine pouches based on their relative risks.

“The Philippine government should adopt data-driven taxation policies that strike a balance between fiscal sustainability and public health goals,” Laffer said.

“Find that sweet spot where you have just the right taxation, you discourage as many smokers as possible without losing them to illicit tobacco, and you collect revenues to implement [tobacco control] programs,” he added.

Laffer, founder and chairman of economic research and consulting firm Laffer Associates, is a former member of U.S. President Ronald Reagan’s Economic Policy Advisory Board and is known for the Laffer Curve, which describes the relationship between tax rates and government revenue.

Kaul, who has worked on international tax policy for Germany at the Organization for Economic Cooperation and Development, said countries that have substantially reduced smoking have used simplified, risk-proportionate tax systems.

“Countries that have significantly lowered their smoking rates implement simplified, risk-proportionate tax systems that influence consumers to move away from combustible cigarettes and switch to reduced-risk alternatives,” Kaul said.

He said maintaining a significant tax differential between cigarettes and smoke-free alternatives “encourages switching.”

Laffer similarly argued that smoke-free nicotine products should be taxed at lower rates than cigarettes to encourage smokers who cannot quit to move toward alternatives.

“Set a lower tax for such products to encourage more smokers to switch to less harmful alternatives,” he said.

Sweden cited as model

Kaul pointed to Sweden as an example of a country that differentiates taxes between cigarettes and smoke-free nicotine products.

He said Sweden’s smoking rate declined from 15 percent to 5.3 percent over 15 years, attributing part of the decline to smokers switching to alternatives.

“Many Swedes stopped smoking, but even more switched [to smoke-free alternatives],” Kaul said.

Laffer, meanwhile, warned that excessive increases in cigarette excise taxes could push consumers toward the illicit market and eventually reduce government revenue.

He cited research from the University of Asia and the Pacific that he said showed a relationship between stricter tobacco policies and illicit cigarette trade in the Philippines.

“The data strongly suggest that the Philippines has gone too far in increasing tobacco tax rates. If you overtax a product, you lose control of the market, you lose revenues, you have more people buying illicit cigarettes,” Laffer said.

Kaul said differentiated taxation should be accompanied by strong enforcement against illicit tobacco.

“Industry innovation is only possible if the illicit market is controlled. When innovative smoke-free nicotine products are available in the legitimate market, more consumers will be encouraged to switch to less harmful alternatives,” he said.