‘Is this Soviet Russia?’ Australia is getting smoked by its tobacco fail

3 months ago 17

Opinion

December 4, 2025 — 3.15pm

The underground trade in illegal tobacco has become a growing cancer for the Australian economy, inflating the cost of healthcare and law enforcement. It’s now so large that it is distorting the national accounts because its sales can’t be measured.

The lost government revenue from untaxed illegal tobacco has also created a gaping hole in the government’s coffers. While the government in 2020 collected $16.3 billion in tobacco excise, it expects to gather closer to $7.5 billion this year – less than half the amount five years ago.

Illegal cigarettes on the black market are on the rise, wiping out tax revenues from tobacco.

Tobacco has become a glaring case of well-intentioned policy backfiring as successive governments have taxed their way to trouble.

The Australian Bureau of Statistics has now made the extraordinary admission that household consumption expenditure figures in its national accounts are misrepresented by its inability to measure how much we are coughing up on tobacco.

It reckons that the stated 0.5 per cent quarterly increase in household expenditure would actually be 0.6 per cent – tobacco adjusted. This may not seem that significant, but it’s a 20 per cent difference.

To counter this, the ABS has revealed it is now “in the early stages of developing a methodology to measure the consumption of illicit nicotine-related products to supplement existing measurement of tobacco products”.

Tobacco has become a glaring case of well-intentioned policy backfiring as successive governments have taxed their way to trouble.

The problem for the statistician is that most tobacco sales are being transacted off the books, as the illegal trade now dwarfs that which is taking place via legal channels such as the supermarkets.

The supermarket revenue figures starkly demonstrate how this is playing out in legal tobacco sales, with both Coles and Woolworths reporting their tobacco sales have halved over the past year.

In contrast, illegal retail tobacco outlets have mushroomed and become a feature around the strip shops of Australia’s suburbs, selling packets of cigarettes for about $15 compared with the legal equivalent pack, which costs more than $50. Consumers are making a clear and understandable choice to buy the illegal products.

Which shows the government’s massive tax on cigarettes has ultimately done more harm – and that harm is affecting a larger cohort.

While smoking rates have been on a gradual decline for decades, and now sit at less than one in 10 Australians, recent data from Roy Morgan says that 17.4 per cent of people over 18 either smoked or vaped and this number rose to near 28 per cent among 18 to 24-year-olds.

The tax rate on cigarettes has grown by about 300 per cent since 2010 under the successive Labor and Coalition governments. The Rudd government began ratcheting up the excise rate with a 25 per cent increase in 2010.

Unsurprisingly, the political parties are blaming each other for the unintended policy outcomes, but they all viewed the revenue grab from tobacco excise as a bonus for public and economic health.

During a Senate committee hearing in Canberra this week, Nationals senator Matt Canavan criticised Finance Minister Katy Gallagher for the steep tobacco excise increases, including a 5 per cent rise in September.

“We’re having to now measure the black economy,” Canavan said. “Is this Soviet Russia?”

Histrionics aside, and using the economic lingo, the taxing of cigarettes has become a clear example of diminishing marginal returns.

And the unintended consequence has been the growth of a black market in tobacco trade.

The illegal market has stretched the resources of law enforcement and fostered the creation of an underworld of black marketeers largely undeterred by penalties and fines. There are now all too familiar instances of the firebombing of shops as rival gangs engage in turf wars.

The trouble is that winding back the excise on cigarettes is politically fraught. And even if the tax was scaled back to zero, illicit tobacco would be cheaper.

The illegal market that has now found root in Australia isn’t going anywhere.