The Soaring Cost of Smokes: Australia’s Expensive Legal Cigarettes Fuel a Booming Black Market
Australia’s reputation as the home of the world’s priciest legal cigarettes has been further cemented, with regular excise duty increases driving up prices to astronomical levels. The most recent six-monthly adjustment, implemented in March, saw a further 2 per cent hike in tobacco excise, directly linked to wage growth. This latest rise means the tax component on a single cigarette now hovers around the $1.52 mark. For a standard pack of 20, this translates to a staggering tax burden exceeding $30, even before factoring in the Goods and Services Tax (GST) or retail mark-ups.
Since 2020, tobacco excise has surged by approximately 60 per cent. This aggressive taxation now accounts for roughly three-quarters of the retail price of legal cigarettes, pushing a standard pack of 20 into the $40 to $50 bracket. The financial strain on Australian smokers is immense. To put it into perspective, a packet of 25 Winfield Blue cigarettes in 1980 cost a mere $1.07. Adjusted for inflation, this would be around $5.79 in today’s currency. Fast forward to the present day, and the same packet commands a price of $46.95, with a substantial $38 of that figure directly attributed to excise and duty. Consequently, a daily smoking habit now incurs an annual cost of approximately $14,600, a figure projected to surpass $15,000 in the coming year.
The Shadow Economy: A Surge in Illicit Trade and Violence
As the cost of legal tobacco has skyrocketed, so too has the illicit tobacco trade across Australia. Victoria, in particular, has become the epicentre of a violent turf war fuelled by organised crime syndicates vying for control of the burgeoning black market. These clashes, ominously dubbed the “Melbourne tobacco wars,” have resulted in over 125 arson attacks targeting tobacco and convenience stores since the beginning of 2023. The violence has also extended to extortion demands, shootings, and tragically, at least one fatality. In response to this escalating lawlessness, Victoria Police established Taskforce Lunar to dismantle the criminal syndicates involved.
Illicit cigarettes, often discreetly sold under the counter or through clandestine “pop-up” tobacconists, are significantly cheaper, with prices as low as $10 to $15 per pack – less than half the cost of legal alternatives. Authorities now estimate that a staggering 60 per cent of all cigarettes consumed in Australia are acquired through the black market. This dramatic shift away from legal channels has had a profound impact on federal revenue. Tobacco excise receipts, which peaked at $16.3 billion in the 2019-20 financial year, are now forecast to plummet to $5.5 billion for the current financial year. Treasury projections indicate a further decline to approximately $4.4 billion by 2028-29. The mid-year budget update revealed a substantial $8.2 billion downgrade in expected tobacco excise revenue over a four-year period, a stark reflection of the mass exodus from the legal market.
Policy Under Scrutiny: Balancing Public Health and Economic Reality
Despite the significant revenue collapse and the alarming rise in violence, the federal government has so far ruled out any reduction in tobacco excise. Instead, it has committed hundreds of millions of dollars towards bolstering border enforcement and compliance operations. However, questions are increasingly being raised in Canberra about whether the current tax regime has reached a tipping point.
During a recent Senate estimates hearing, Finance Minister Katy Gallagher confirmed that Treasury is actively examining the price elasticity of tobacco demand – essentially, how sensitive demand is to price fluctuations. This assessment involves consultations with health and home affairs officials as part of ongoing policy deliberations. Diane Brown, a Deputy Secretary at Treasury, informed senators that officials are modelling how demand patterns have evolved in response to the soaring prices.
Some economists contend that the government’s long-standing strategy of taxing smoking out of existence is now clashing with economic realities. Prominent economist Chris Richardson has openly stated that Australia “got the taxing of tobacco spectacularly wrong,” arguing that the widening price disparity between legal and illegal products has inadvertently created an unprecedented revenue stream for organised crime. Alternative suggestions include at least freezing the excise to allow the real cost of cigarettes to gradually decrease over time, coupled with more robust enforcement measures and stricter licensing regimes for tobacco retailers.
A High-Risk, High-Reward Environment for Criminals
Australia already imposes some of the highest tobacco taxes globally. Tobacco-specific taxes constitute over 65 per cent of the average retail price, and this figure can climb as high as 84 per cent for cheaper “budget” brands. The rapid escalation in these taxes began with a substantial 25 per cent overnight increase in 2010. This was followed by eight consecutive annual hikes of 12.5 per cent between 2013 and 2020. More recently, the government introduced additional 5 per cent annual increases from September 2023 through to 2025, on top of routine indexation.
This stringent policy has undoubtedly contributed to a significant reduction in the national daily smoking rate, which has halved over two decades, falling from 22.1 per cent in 2001 to 9.2 per cent by 2022. However, critics argue that an unintended consequence has been the creation of a lucrative, low-risk market for criminal syndicates eager to undercut legal retailers. Victoria, notably the only state without a comprehensive tobacco retail licensing scheme, has signalled its intention to introduce one in an effort to curb the estimated 1100 illegal “pop-up” tobacconists operating within its borders.
Meanwhile, authorities face mounting logistical challenges and costs associated with seizing, storing, and destroying millions of illicit cigarettes and vapes. The surge in youth vaping, coupled with discarded vaping devices posing fire risks at waste facilities due to their lithium-ion batteries, adds further complexity to the situation. The central question confronting policymakers remains: will ever-increasing cigarette prices continue to drive down smoking rates, or will they simply push more Australians into the embrace of the black market?
