Tobacco tax spurs black market crime wave

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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”.

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In December last year, Australian Federal Police assistant commissioner, Wayne Buchhorn, warned that illegal tobacco smuggling is rampant, funding organised crime and posing a potential national security risk.

And in August this year, The AFR reported that the Black Economy Taskforce’s chairman, Michael Andrew, planned 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.

Over the weekend, Fairfax reported how there is a massive black economy in cigarettes has emerged in Australia to circumvent the endless tax-induced price hikes:

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In modern Australia the newest illicit product on a growth curve is one of the oldest – tobacco…

Border Force estimates nearly 15 per cent of all tobacco sold in Australia has been illegally imported to avoid local taxes. And little wonder. The price of cigarettes has doubled in the last six years, with a packet expected to cost $40 in just over two years.

…many smokers who feel they are unfairly taxed to indulge in what remains a perfectly legal pastime have turned to the illegal market to satisfy their cravings…

Police are reporting illegal “pop-up” shops appearing virtually overnight in regional areas, with queues out the door as smokers line up for cheap cigarettes…

The figures are staggering. Border Force have created Tobacco Strike Teams that have in the last 12 months seized 96 million illegally imported cigarettes from one organised crime group. In two years from 2015 they have seized 400 tonnes of tobacco that would have evaded excise of $294 million. In the last financial year, the total was around 180 million fags weighing 174 tonnes.

For that is what crooks do: Seek the maximum profit from their illegal activity.

With Australian smokers the highest taxed in the world, we have become the most lucrative spot for illicit cigarettes…

The price of the local product has created its own crime wave, with gangs of young offenders targeting stores that supply cigarettes…

In 2016-17, there were 190 cigarette-related armed robberies and more than 450 commercial burglaries targeting the product. When you consider the crooks can sell a stolen packet for $10 a pop, no questions asked, you can see the profit margin is immense…

It was all so predictable, wasn’t it?

Rather than trying to raise Budget revenue by continually increasing tobacco taxes, in the process fuelling organised crime, the Government should instead legalise and tax marijuana. There is no sound public policy reason why alcohol and tobacco are legal (but taxed) 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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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.