Australian Treasury officials are examining potential modifications to the nation’s tobacco excise system as mounting pressure builds for authorities to halt further tax increases on cigarettes. The current levy has surged 60% since 2020 and now represents three-quarters of the retail price of legal cigarette packs.
Research indicates that Treasury is analyzing price elasticity models to understand how cigarette costs affect consumer demand, particularly as illegal tobacco markets continue expanding. Lachlan Vass from the e61 Institute suggests this economic modeling represents a crucial preliminary step toward evaluating potential excise reforms.
Despite previous resistance from Treasurer Jim Chalmers and Health Minister Mark Butler to reducing cigarette prices as a solution for combating black market trade, Finance Minister Katy Gallagher recently indicated openness to policy adjustments during Senate estimates hearings. She emphasized that the government maintains ongoing reviews of these policies while consulting with home affairs and health departments.
The illegal tobacco market has created substantial fiscal challenges, with black market cigarettes costing approximately $10-15 per pack compared to $40 or more for legal alternatives. According to the Illicit Tobacco and E-cigarette commissioner, illegal products now account for roughly half of all tobacco consumption across Australia.
Revenue Decline and Market Impact
Government tobacco excise collections have declined dramatically from their 2019-20 peak of $16.3 billion to projected revenues of just $5.5 billion this financial year, with forecasts dropping to $4.8 billion next year. This represents a cumulative revenue loss of $17.8 billion since 2020-21.
Several economists argue that tobacco taxation reached a critical threshold around 2020, with some experts calling the policy approach fundamentally flawed. Economist Chris Richardson characterized the situation as spectacularly misguided, claiming current policies have inadvertently subsidized organized crime revenue streams.
The government has allocated an additional $350 million over two years to assist state enforcement efforts against illicit tobacco trade. However, experts suggest this enforcement-only approach may prove insufficient without complementary tax policy adjustments.
Expert Recommendations for Reform
Vass advocates for at least freezing current excise rates to allow cigarette costs to decrease in real terms over time, integrating this approach with broader health and enforcement strategies. He argues that evidence demonstrates current excise policies are failing across multiple objectives.
Treasury Deputy Secretary Diane Brown confirmed that officials are conducting elasticity modeling to determine whether demand patterns have shifted, indicating potential policy cost analysis rather than routine budget projections.
Professor Becky Freeman from the University of Sydney, a prominent tobacco control expert, supports freezing excise rates at current levels. She argues that tax increases should only continue if they effectively reduce smoking rates, noting that the prevalence of cheap illegal alternatives undermines potential health benefits from further price increases.
The debate reflects broader tensions between public health objectives, revenue generation, and law enforcement challenges as policymakers grapple with unintended consequences of aggressive tobacco taxation strategies.
Photo by Shaun Meintjes on Unsplash
Photo by Haim Charbit on Unsplash
