Effects of TRAIN fuel excise taxes on goods and prices

Abstract

In January 2018, the first package of the Tax Reform for Acceleration and Inclusion (TRAIN 1) Law took effect. Among others, it adjusted income brackets and personal income tax rates, excise tax rates, and value-added tax coverage. The increase in excise taxes in selected commodities is a complementary measure to the reduction of personal income tax rates. Specifically covered by excise tax adjustments are fossil fuels and petroleum products, automobiles, and sugar-sweetened beverages. Like in many countries, excise taxes are imposed on fossil fuel products due to their negative spillovers to society arising from carbon dioxide (CO2) emission, which is associated with global warming and climate change. The policy, however, does not exist in a vacuum and the shortrun inflationary costs of higher fuel prices seem too high despite potential long-run benefits. This Policy Note discusses the impacts of the increase in excise tax rates for fossil fuels under TRAIN 1 on productive activities and prices across the economy.