Tobacco tax fueling black market crime

By Leith van Onselen

In February last year I noted that the cigarettes tax – a policy adopted by both major parties in the lead-up to the Federal Election – would achieve two broad outcomes:

  1. It would fail to raise the projected revenue. With smoking rates falling, it is a declining tax base and this decline would only accelerate the further taxes are increased. Moreover, since the majority of smokers are from lower income brackets, any increase in excise would force them to cut back expenditure, thus lowering tax revenues elsewhere.
  2. With the cost of a cigarette rising to nearly $2 a dart, a lucrative black market would develop, which would undercut the Government’s forecast tax take.

In May last year, a report by the Australian National Audit Office produced a damning assessment of the policy, arguing that revenues would fall short precisely because of the factors I highlighted above:

“There is uncertainty about forward estimates of tobacco revenue, as these estimates do not incorporate a change in supply and demand of dutiable tobacco arising from cheaper illicit product”…

The ANAO report said budget assumptions did not “factor in the size of the illicit trade in tobacco and potential changes to the supply of and demand for dutiable goods as a result of the increase in costs in the legitimate market”.

Then in December, Australian Federal Police assistant commissioner, Wayne Buchhorn, warned that illegal tobacco smuggling is rampant, funding organised crime and posing a potential national security risk. From The ABC:

The illicit tobacco trade has received far less attention from police and security agencies when compared to terrorism, drug and weapons trafficking and people smuggling…Attracted by the huge revenue streams and lesser penalties applied to those caught tobacco smuggling, organised criminals have moved with relish into the trade, using proceeds of tobacco smuggling to pay for other activities…

“That has the potential to cause corruption within government agencies and more broadly. So the potential for that to be a national security risk for me is very real”…

Mr Buchhorn, who has served in senior policing roles in Australia and Afghanistan, said it was extremely easy to buy black-market cigarettes in Australia, fuelling what was “probably a billion-dollar trade”.

Successive Federal Government tobacco tax hikes — Treasurer Scott Morrison unveiled further increases in the May Budget that will lift the price of a pack of smokes from $25 to $40 — boost the financial return for organised smuggling syndicates.

Over the weekend, The AFR reported that the Black Economy Taskforce’s chairman, Michael Andrew, plans to urge the federal government to clamp down on the illegal tobacco industry, with Philip Morris estimating that illegal trade is costing the government almost $4 billion a year in foregone tobacco excise:

“I will be recommending an illegal tobacco blitz,” said Michael Andrew, chair of the powerful taskforce appointed by the federal government to identify and recommend strategies for tackling the nation’s black and cash economies.

Asian and Middle Eastern crime gangs are believed to be using an intricate network of distributors to sell smuggled and locally grown “chop chop”, which is raw tobacco, cigarettes and “shisha”,  a fluid tobacco smoked through a water pipe.

Police and tobacco industry chiefs fear proceeds could be used to fund terrorism, buy political favours and support other unlawful activities…

Illegal imported and locally grown cigarettes are being sold through small stores, including independent tobacconists, and sex shops under the brand names “Original Gold” and “Special Gold”.

Asian and Middle Eastern crime gangs behind the products are using stand-over tactics to further distribution, according to police and industry sources.

“Illegal tobacco consumption in Australia is one of the largest frauds on Commonwealth revenue, with one expert recently suggesting the fraud costs government almost $4 billion each year in lost tobacco excise alone,”  said a spokesman for Philip Morris, a global tobacco and cigarette company.

Rather than continually raising tobacco taxes, and fuelling organised crime, the Government should instead legalise and tax marijuana. There is no sound public policy reason why alcohol and tobacco are legal and pot isn’t. Moreover, legalisation of marijuana would ensure purity of supply, reduce profits to organised crime, and lower law enforcement costs. It’s a win, win, win.

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Unconventional Economist


  1. They still haven’t targeted the product as an effective means of reducing smoking incidence. If they ban certain ingredients and mandate that all filters are bio-degradable within 12 months it will radically change the smoking experiences in a negative way and people will realise that they actually taste awful.

    Instead … they just go for price, pack, promotion and place (distribution). Simple marketing to include the product ‘p’.

    • The US look like they might ban the one ingredient that really matters.


      Ban the use of that in cigarettes and other tobacco products and there goes the market.

      Remove the bans on Vaps and other modes of nicotine ingestion and let the addicts indulge at zero risk to their health.

      I haven’t heard of any significant health risks from patches and gum?

    • kiwikarynMEMBER

      If the Govt really wanted people to quit smoking then quit smoking aids like patches, pills, and hypnotherapy would be free. Of course, the Govt doesnt want people to quit smoking as they would rather have the taxes.

      • That’s a good question.

        Has the tax take fallen as smoking rates have collapsed or have the tax rate increases made up for the reduction in consumption?

      • The federal tobacco tax take went up about 30% from 2001 to 2016 in inflation adjusted terms.
        Over the same period, the population went up 24%.

        Personally, I’d guess that the effect of extra taxes on existing adult regular smokers would be fairly small, but there would be a bigger effect on young smokers trying tobacco for the first time or on the threshold of moving from experimental to regular smoking. Hence, I’d guess that it could take a decade or longer to see the full effect of any increase to taxes on smoking rates.

    • You can’t stop anything. As long as there’s demand there will be a supply. It is an immutable law.

  2. reusachtigeMEMBER

    The government needs to ban cigarettes so that the black market can better meet the demand and make bigger profits!

  3. With respect to marijuana may I suggest that like it was in the U.S. it provided staffing and resource allocation justification for several departments.

  4. Reduce durry taxes. Smokers die earlier and are less of a burden on pensions and hospitals. If anything we should encourage smoking.

    • Andrew LeesMEMBER

      I have occasionally wondered where the balance of costs lie with smokers – I suspected like you that they were net less of a social cost than people who don’t smoke and live longer. My son tells me that it is not so, however, and they cost more overall.

      I did conceive a rather lovely anti-smoking advert, where an old guy is showing his son a memorial with row after row of names on it, dedicated to the smokers of Australia, who save the rest of us lots of tax by dieing young – ” Oh and they suffer son, how they suffer. Heroes they are, heroes!”

      • Some people really enjoy smoking and are happy to live a more modest life. Dying is usually painful and humiliating even if you haven’t smoked. All these rabid anti smokers are often zipping around the world blasting c02 into the air and wanting to import infinity immigrants hungry for a big western environmentally degrading life. Fuck em. They shouldn’t have freedom of speech.

      • kiwikarynMEMBER

        Everybody has to die from something. Dying from a smoking related cancer is no more expensive than dying from a non-smoking one. Plus if smokers die 10 years earlier than a non-smoker then they have saved the Govt 10 years of pension payments, aged care subsidies, and all the free stuff old people are entitled to.
        Plus smoking taxes long ago surpassed the actual healthcare costs of smokers – so smokers are now subsidising the general populations healthcare costs.

      • The study has already been done in Australia
        Published several years ago

        Showed that smoking was pretty much a wash cost-wise, as the pension savings balanced the health costs

        Two other factors to consider:
        -people dying earlier keeps the population down, which is nice for everyone else’s QoL
        -the disgusting second hand smoke you have to breath in every time you walk down the footpath, or if you have a backyard or balcony next to one of these degenerates, reduces your QoL

        So overall they possibly balance out as well

    • According to this book by Peter Taylor

      the British government commissioned a study in the 1960s on the fiscal effects of raising taxes on tobacco enough to seriously reduce consumption. The study found that there would be a net loss, even though there would be savings on the hospitals, because the savings on smokers’ pensions, etc. would be lost. Nothing was done, of course. The calculation changed once there were more expensive treatments for smoking related diseases and people with them could be kept alive for longer.

  5. Pauline Hanson said that electronic cigarettes should be legalised.

    She is also against privatisation.

    Populist? Um, politicians are indeed meant to do what the voters want!

    Honestly, electronic cigarettes should be legalised.

  6. For a good discussion on prohibition, decriminalisation and legalisation I highly recommend the book ‘Chasing the Scream’.

  7. kiwikarynMEMBER

    Over this side of the ditch, local dairies (aka milk bars) and corner grocery stores are a dying breed due to the increase in the number of armed robberies being committed for the purpose of stealing cigarettes. I also have it on good authority that if you want to pay for something on the black market (other drugs, stolen merch etc) then cigarettes are an acceptable means of currency.

  8. Disgusting, demanding servitude for the ailments of others.

    A shrinking tobacco tax is only problematic if it taxes in excess of its societal cost, it does and government is shouldn’t be entitled to it.

    Marijuana is a hideous drug and I’d be outright appalled to see government reap a cent from its misery.

  9. And whilst we are conflating topics in atypical lefty spirit when are we going to start taxing all the fatties?

    $300 per Kg of excess fat per year no exceptions otherwise we will impound your ass.

    • Jumping jack flash


      Think of the diabetes. I’m sure there are more people dying from, or treating complications from, type 2 diabetes than there are from smoking.

      It’d be interesting to see the numbers comparing the two.

      • With about 13% of the adult population being daily smokers, that’s about 2.5 million smokers, compared to about 1.5 million Australians living with type 2 diabetes (per Diabetes Australia).

  10. thomickersMEMBER

    Rather than raising the excise tax on Tobacco… how about make smokers pay “smoker rates” for private health insurance or the Medicare levy? People already pay smoker rates for life insurance anyways.

    • Jumping jack flash

      thought they already did for PHI?
      Pretty sure you need to declare it. Don’t know if this is included in the premium calculation.