Tuesday night's federal budget revealed a sharp drop in what was once a major source of revenue for the government - the tobacco excise.
Authors
- Fei Gao
Lecturer in Taxation, Discipline of Accounting, Governance & Regulation, The University of Sydney, University of Sydney
- Andrew Terry
Professor of Business Regulation, University of Sydney
This financial year, the government expects to earn revenue from the tobacco excise of A$7.4 billion . That's down sharply from $12.6 billion in 2022-23, and an earlier peak of $16.3 billion in 2019-20.
The government expects this downward trend to continue. Australia's heavy tobacco taxation has driven many consumers towards illicit cigarettes.
But this is more than just a problem for government coffers accustomed to revenue from the tobacco tax.
It presents a major challenge for a public health policy that has long relied on increasing tobacco excise duty as its primary tool to reduce smoking.
Climbing tax rates, falling revenue
If government revenue from tobacco is falling, it isn't because we aren't trying to tax it. Cigarette prices in Australia are among the highest in the world, with taxes making up a substantial chunk of the price.
About $1.40 of the cost of each cigarette represents excise duty. GST is payable on top of that.
Australia's tobacco excise is indexed every March and September, in line with average weekly ordinary-time earnings.
On top of indexation, the excise rate is currently being increased by an additional 5% each year, for a period of three years that began in September 2023.
This policy is grounded in the principle that higher costs deter smoking. And smoking rates have fallen in recent decades. About 8% of Australians aged 14 and over still smoke daily, down from almost 20% in 2001.
Some of that fall has been offset by the rapid ascent of vaping. About 7% of Australians use e-cigarettes - about half of whom vape daily.
But while legal cigarette prices are prohibitively high for some, illegal alternatives are widely available and significantly cheaper. That's because these unregulated products bypass excise and GST entirely.
Unintended consequences
The estimated value of illicit tobacco entering the Australian market has soared, from $980 million in 2016-17 to more than $6 billion in 2022-23. Of this $6 billion, almost $3 billion entered the market undetected.
The actual decline in tobacco excise revenue, as exposed in the latest budget papers , has been much more significant than previously forecast .
To make things worse, the cost of enforcement is rising . The 2025-26 federal budget allocates an additional $156 million over the next two years to combat illicit tobacco - on top of the $188 million committed in the previous budget.
There are other broader impacts on overall tax revenue. Convenience stores lose legitimate sales to illegal tobacco vendors, resulting in less corporate tax income.
Holding back broader public health efforts
On other measures, Australia has long been a global leader in tobacco control. The first health warnings on cigarette packets appeared in 1973 .
In 2006 , graphic health warnings were introduced. And in 2011, Australia pioneered plain packaging laws.
Such public health measures are set to get even stronger this year, with new requirements for every individual cigarette sold to have an "on-product" health warning such as "causes 16 cancers" or "shortens your life".
These new regulations come into effect on April 1 2025, but retailers will have a three-month transition period to phase out existing stock.
The tight transition period may prove challenging for the legitimate cigarette trade.
But it is unlikely those who ply the unlawful trade in illegal tobacco - or their customers - will be particularly bothered by this latest attempt to wean the public off the habit.
No easy solution
The increasing heavy tobacco excise and the new law requiring warning messages on individual cigarettes have the potential to reduce tobacco consumption among those who purchase the product legally.
However, suppliers of black-market cigarettes - who now comprise an estimated 18% of market share - are unlikely to allow this initiative to affect their illegal trade.
The widespread move to vaping , with poor regulation, has further fuelled the black market for both products.
It is going too far to draw parallels with the prohibition era in the United States, when the manufacture, transportation and sale of alcohol was illegal. This was a brief but disastrous experiment in social engineering with unfortunate and, in retrospect, arguably predictable consequences.
But there are some unfortunate similarities when it comes to Australia's tobacco tax policy, which has inadvertently encouraged black markets, criminality and organised crime.
Yet for the government, lowering the excise tax to encourage smokers back to legal cigarettes would be completely out of step with its public health objectives. Legal or illegal, black-market cigarettes and vapes still contribute to health risks, undermining the public health goals behind regulatory controls.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
