Malcolm Baalman
The tobacco retail industry is running a targeted campaign to persuade the federal government to freeze or reverse the level of taxation on tobacco products.
Industry voices argue that Australian tobacco taxation is high by international standards, and that the decade of steady increases has boosted the illicit market. This is not unique – the tobacco industry has for decades pushed the same argument globally, in nations with taxes high or low. It’s one of their most persistent political campaigns. But the causal link between tax levels and illegal market size cannot be proven. The industry also claims ,with even less evidence, that cutting those taxes will automatically shrink the illicit trade.
Australia’s tobacco policy is guided by the National Tobacco Strategy 2023–2030…It’s main goal is to stop children and young people becoming addicted to nicotine.
Every nation has illicit tobacco trade activity, and has for many decades. The size of illegal markets is difficult to measure using normal public statistics. It is typically estimated indirectly by comparing surveyed rates of consumption with the estimated amount of legal product consumption deducted. Data from the National Drug Strategy Household Survey indicates that the proportion of Australians, using any amount (that is, not limited to regular or daily smokers) of illegal tobacco increased between 2019 and 2022–23 from 9.9% to 16.5%.
The tobacco industry claims that the illicit market’s size is based on changes in revenue collection, but these estimates fail to include that the ‘total market’ is shrinking.
The graphic below, from a 2024 report commissioned by a tobacco company which may well exaggerate the illicit market’s size, displays the big picture; the proportion of tobacco use that is illegally supplied may be growing, but overall consumption is falling.
National strategy places protecting young people first
Australia’s tobacco policy is guided by the National Tobacco Strategy 2023–2030, last revised in 2022. The strategy’s main goal is to stop children and young people becoming addicted to nicotine. Australia’s been remarkably successful at this, as the data above shows.
One element of that strategy is the policy influence on product prices driven by tax settings. Among an interlocking suite of policy measures, tobacco taxation is believed to be the main intervention to0 reduce tobacco consumption. The World Bank estimates that in general a 10% increase in price results in a 4–5% consumption reduction.
Australia’s pathway of steady and significant increases in tax rates since 2010 has been shown to be a major reason why smoking rates are falling. Survey data from the NDSHS indicates cigarettes’ cost is the most cited reason for wanting to quit (53.3%), followed by health impacts (45.4%).1 The policy framework is, therefore, working as intended.
Freezing the tax will not cut the illicit market
The tobacco industry claims that Australia’s tax settings have increase the size of the illicit market. Such claims cannot be proven, nor can the real extent of such an impact be quantified.
There is no guarantee that lower prices – whether occurring through market forces or through tax policy settings – diminish the existence of illegal markets. Countries including the US, Vietnam, and the Philippines all have substantially lower tobacco prices than Australia, but have significant levels of illegal trade.
Research on the relationship between tax and illegal tobacco across countries finds little correlation between tax levels and illegal trade in tobacco. In fact, countries with higher taxes have often had lower illegal trade.
Reducing Australia’s excise to a level that competes with the price of illegal products (as low as $10- $15/packet) is inconsistent with our strategic goals.
Consider Canada, which reduced its cigarette excise in the 1990s. Total smoking rates increased, particularly among young people, while cessation (quitting) rates declined. Do we want to risk replicating that in Australia?
Here’s what would need to happen for Australia’s excise cuts to cause a fall in illicit tobacco consumption.
- Legal traders would need to pass on all tax reductions to customers as price reductions, and in turn see customers identify a large enough shift in comparative prices between illicit and legal options to change their purchasing decisions. Illicit traders would also need to maintain their own prices in response.
- Then, we’d need to see a sufficient impact on illicit trading’s profitability for those suppliers to lose their market share – which we cannot accurately measure now or after a policy change. There are signs that that illegal trading is not following normal commercial imperatives, but is a front for wider criminal activity.There’s no reason to expect that criminal operators would fore go their profit stream because of a modest decline in profit.
- Lastly, we’d need a criminal sector which is demonstrably highly adaptable, determined, and defiant of all policy direction, to stay still despite any tax policy change.
Only if all of these things happened would the size of the illicit market significantly decrease, which, as explained, we’d still not be able to measure.
Clearly, this complex chain of hope could break at every link. As a public policy intervention, reducing taxes with the aim of reducing the scale of the illicit market is unsupportable.
The most likely result would be that the foregone public revenue would simply mean retailers’ profits increased.
There is also no logical sense in calculating that public revenue can be increased from such a tax-cut intervention. It is pointless to hold out increased tax revenue as a goal. Tobacco use is falling, and our policy regime should plan for a steady long-term decline in the revenue collected.
Ultimately, the most effective means of diminishing the scale of the illicit market over time will be to maintain our national policy to prevent teenagers and young adults in Australia from ever developing a nicotine addiction.
Malcolm Baalman is the PHAA’s Policy and Advocacy Manager
This explainer is based on PHAA’s submission to the NSW Legislative Council 2025 inquiry into the illicit tobacco trade.
There is also extensive information about this subject on the Cancer Council’s Tobacco in Australia – Facts and Issues.
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