The Illicit Tobacco Trade: A Rising Challenge in the Philippines

In recent years, the Philippines has witnessed a troubling trend: the rise of illegal cigarettes and vaping products as a consequence of high excise taxes. This has led to an unexpected increase in smoking rates, countering the government’s initial aim to curb tobacco consumption.

Understanding the Impact of High Excise Taxes

Industry stakeholders have raised alarms, stating that rather than reducing smoking rates, these elevated taxes have inadvertently made illicit products more accessible. A study from Canada reinforces this idea, revealing that untaxed cigarettes provide smokers with alternatives that hinder efforts to quit, contribute to relapses, and attract new users.

The Economic Divide: Legal vs. Illegal Products

The wide gap in pricing between legal and illegal tobacco products is a significant driver of the illegal market. Though the Sin Tax Law initially generated considerable revenue—P176 billion in 2021—recent years have shown a downturn. Lawmakers are expressing concern, citing a consistent decline in cigarette excise tax revenues, with losses reported at 9% in 2022, 23% in 2023, and 26% in 2024.

Alarming Trends in Smoking Rates

According to the Food and Nutrition Research Institute, smoking rates in the Philippines have surged from 19% in 2021 to 24.4% in 2023, indicating a growing number of smokers—approximately 16.4 million adults. Maria Kristina Marasigan from the Department of Health stated that the illicit cigarette trade is undermining the nation’s tobacco control measures.

Legislative Backing Against Smuggling

Former Senate President Franklin Drilon, who played a pivotal role in enacting the Sin Tax Reform Law (Republic Act 10351), expressed concern over increasing cigarette smuggling. He emphasized that it is nearly impossible to reduce smoking rates while affordable, illicit options are readily available.

The Vaping Market: A New Battlefront

The rise of illicit vaping products has also emerged as a significant issue. In early 2025, authorities seized over P5 billion worth of unregistered vapes. The complex tax structure—where freebase nicotine is taxed at P6.62 per milliliter while nicotine salts face a much higher tax—has resulted in widespread misdeclaration, further complicating enforcement efforts.

Pricing Insights: Legal vs. Illicit

While the Bureau of Agriculture reports that the cheapest legal cigarette pack costs around P125, most legal brands range between P160 and P225. Meanwhile, illicit brands can be found selling for as little as P30 to P80 per pack, which makes them extremely attractive to consumers.

Theoretical Insights: The Laffer Curve

Dr. Arthur Laffer, renowned for his economic theories, has noted that high tax rates can reduce government revenues by incentivizing tax evasion and promoting an illicit market. He argues that the Philippines may have reached a “prohibitive range” concerning tobacco taxes.

Fixing a Flawed System

Bienvenido S. Oplas Jr., president of Minimal Government Thinkers, suggests that an optimal tax rate of P50 per pack could restore revenue levels seen in 2021. However, he points out that the tax hikes since then have negatively impacted revenue generation.

Calls for Reform

Philippine Tobacco Institute President Jericho Nograles argues that the government’s annual tax increase strategy has failed. He notes the illegal sale of tobacco products to minors and the explosion of online distribution with limited oversight.

The Broader Consequences of Illicit Trade

A 2015 U.S. Department of State paper titled “The Global Illicit Trade in Tobacco: A Threat to National Security” emphasized that cigarette smuggling not only undermines health regulations but can also expose consumers to harmful products. Studies show that individuals using illicit tobacco products often experience significant adverse health effects compared to legal smokers.

Restoring the Intended Impact of Legislation

The Philippine Tobacco Institute has stated that reforming the existing tax framework could effectively reduce illegal commerce, enhance government revenue, and restore the original objectives of the Sin Tax Law.?

Conclusion

As the Philippine government confronts the dual challenges of rising smoking rates and an expanding illicit market, a reevaluation of tax policies may be crucial in reversing this trend and ensuring the public health objectives are met.