Tobacco excise isn't making Australians smoke less and should be frozen to curb black market, economists say

The Guardian

a day ago

Economists say the tobacco excise rate is too high, is not lowering smoking rates and should be frozen or even 'radically' reduced as a way to address the soaring black market trade in cigarettes.
It comes ahead of a meeting of state and federal health ministers on Friday and after the NSW premier, Chris Minns, last week demanded the Albanese government cut the excise rate to combat an explosion in black market tobacco and an associated rise in organised crime.
In Victoria a rash of firebombings have underlined the policing challenges associated with the illegal cigarette trade, with the state's Labor government also calling for a cut to the excise rate, which has tripled over the past decade – making Australian cigarettes the most expensive in the developed world.
With the Australian Taxation Office estimating that about a fifth of tobacco for sale is now illegal, the director of the ANU's tax and transfer policy institute, Bob Breunig, said 'the evidence is pretty clear that every time we raise excise at this point we are not reducing smoking at all'.
'The point is to get people to smoke less, and it's not working. I don't think we should lower it, but freezing it is a good idea, and then doing something that deals with illegal tobacco is the next obvious step,' Breunig said.
Breunig acknowledged the tax, alongside other complementary measures, had contributed to the halving in smoking rates over the past two decades, from 21% of adults smoking daily in 2005 to just shy of 11% in 2022.
'Our tobacco policies have been very successful versus other countries. We've had a big success story and we've gone as far as we can go with the excise. Now it's time to pull other levers, such as more education.'
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Over the past decade, the excise rate per cigarette has tripled from 46c to $1.40. The excise now accounts for $28 of the average $40 price for a packet of 20 cigarettes.
For some time a rising tax was associated with the twin benefits of falling smoking rates and rising revenue, but after peaking at $16.3bn in 2019-20, federal excise receipts have plunged.
The March budget forecasts tobacco excise receipts will be just $7.4bn in this financial year – the lowest since 2012-13 – and will continue to fall to $6.7bn by the end of the decade.
Rather than a sudden collapse in smoking rates, experts point to an explosion in the availability of black market tobacco in recent years.
An equivalent of 605.8m cigarettes in illegal tobacco was seized at the border in 2019-20, according to government figures. By 2022-23, border seizures had reached the equivalent of 2.6bn cigarettes before easing to 2.2bn in 2023-24.
Jim Chalmers and the federal health minister, Mark Butler, have both ruled out lowering the excise, arguing it will do nothing to reduce the illegal tobacco trade. Instead, they advocate stronger compliance measures.
Terry Slevin, the chief executive of the Public Health Association, agreed, saying he was worried that policymakers were being 'conned' by the tobacco industry.
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'I think it's perfectly legitimate for the current excise rate to remain at its current level to allow time for the proper enforcement to be put [in] place,' Levin said.
'Once that's in place and the immediate and substantial problem of illicit tobacco has been addressed, then we can consider that [the excise rate] along with other tobacco-control strategies to reduce what remains an enormous burden on the health of people in Australia.'
Fei Gao, a business law lecturer at the University of Sydney, said neither of the two 'main goals' of the excise – as a source of revenue and to discourage smoking – 'have or will be achieved in the future, because of the existence of the black market.
'The government needs to realise they can't have it both ways,' Gao said.
'Either the tax is mainly a revenue source, which means they need to engage experts to work out the ideal [lower] rate that will capture the maximum revenue, or they need to keep a high excise rate and then reinvest the receipts into fighting the black market.'
Richard Holden, an economics professor at UNSW's business school, said it was clear that the level of the excise rate had passed a tipping point and was now counterproductive.
'We went pretty hard on increasing the excise rate and it backfired. They raised it too high,' Holden said.
'Clearly the excise has gotten over a threshold and triggered an illicit market reaction. '
Holden said it would take more than a 'tweak' to the excise rate to remove the incentive to buy and sell illegal tobacco, suggesting a radical excise reduction for two years.
The excise rate increases twice a year, in March and September, in line with the rise in a measure of wages called the average weekly ordinary time earnings. On top of this indexation, the tobacco excise is also climbing by an extra 5% a year for the three years to September 2026.
As a share of income, cigarettes are nearly four times more expensive than they were three decades ago.