No guarantee tobacco tax cut would lure Australian smokers from illegal trade and raise more revenue, report says
Slashing the tobacco excise might not be enough to lure smokers back to legal cigarettes, and could even widen the multi-billion dollar hole blown in the budget by the booming illicit trade, new research shows.The analysis from the e61 Institute comes as Jim Chalmers revealed next week’s mid-year fiscal update will reveal an extra $12.7bn in unanticipated spending, including an additional $6.3bn in higher than expected disaster relief payments.The treasurer said “the biggest job … has been making room for unavoidable pressures and payments without a substantial deterioration in the bottom line”.
The collapse in tobacco excise revenue in recent years has put further pressure on the budget position, which remains mired in a structural deficit.Australia’s high tobacco taxes have been part of a successful, multi-pronged strategy aimed at reducing smoking rates over recent decades.Alongside the deterrence effect of expensive smokes, heavily taxed cigarettes helped swell the government’s coffers, with excise revenue peaking at $16.3bn in 2019-20.Since then, however, a series of regular and one-off increases has lifted the excise rate by 50% and driven smokers into the illegal market to avoid the most expensive cigarettes in the world.
Sign up: AU Breaking News emailWith the Australian Taxation Office estimating illegal sales account for about a quarter of all cigarette sales, annual excise revenue has more than halved over the past five years to $7.8bn.Last month the NSW premier, Chris Minns, said the excise was the “leading reason” for the recent boom in illegal tobacco and the associated surge in criminal behaviour.“A legal packet of 20 cigarettes costs $50 bucks … and you can pick up an illegal packet of cigarettes for $13,” he told ABC Radio Sydney.Minns has demanded a “review” of the excise rate, even as the federal government has dedicated an extra $350m over the past two years to help state authorities battle the illicit trade.
Chalmers refuses to entertain the idea of making cigarettes cheaper, and health experts back properly enforcing rules to contain the illicit market.“While revenue may be a secondary policy goal, it is still consequential,” write two e61 economists, Josh Clyne and Lachlan Vass.For context, if tobacco revenue had come in as budgeted in 2024-25, the government’s bottom line would have been $3.8bn better off.That would have been enough to pay for a $100 increase in the fortnightly jobseeker rate, Clyne and Vass say – “in part helping to offset the regressive nature of tobacco taxation”.
The challenge of what to do with a tobacco tax policy that has led to such perverse outcomes “is made harder as the government cannot guarantee that cutting excise will raise more revenue”, they write.With criminal trade in tobacco now entrenched, and the purchase of illegal smokes potentially “normalised”, lowering the excise rate back to 2019 levels will not return revenue to where it was before the black market took off.In fact, it could even drive the tax take down, if very few smokers were tempted back to legal cigarettes.“Depending on how smokers and illicit sellers respond, we estimate the annual revenue impacts range from a $2.1bn decrease to a $3.
2bn increase,”The research pointed to the need for a “holistic approach to combating illicit tobacco”, the economists write,“For example, devoting additional resources to enforcement could help increase the effect of a tobacco excise cut on the illicit market,” backed up by a public education campaign,“To execute this type of holistic strategy a broad coalition is required, including public health advocates being comfortable with the idea of decreasing the price of tobacco,“But the time has come to form such a coalition, otherwise we risk failing to achieve any of tobacco policy’s goals.
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