When taxation becomes prohibition: Australia’s tobacco policy reaches breaking point

The Coalition’s plan to cut tobacco excise by 80 per cent is confronting Australia with an uncomfortable question: has a successful public-health policy been pushed so far that it now enriches organised crime?

Australia has spent decades making cigarettes harder to advertise, harder to obtain and increasingly expensive to buy.

The results have been substantial. Smoking has declined from an entrenched social habit to an activity pursued by a relatively small minority of Australians.

But another market has emerged beneath the official figures.

Illicit cigarettes, loose tobacco and unregulated vaping products are being sold through tobacconists, convenience stores, social media and criminal networks. Legal retailers face competitors who do not pay tax, comply with packaging laws or observe age restrictions.

The Coalition now proposes a dramatic response: reduce tobacco excise by 80 per cent, regulate vaping and nicotine pouches, and spend an additional $200 million attacking the criminal organisations supplying the illegal market.

It is an extraordinary policy—but it has emerged because the present system is no longer working as intended.

From public-health policy to price prohibition

Taxing tobacco has a legitimate and proven purpose.

Higher prices discourage people from beginning to smoke, encourage existing smokers to quit and help offset some of the enormous public cost of tobacco-related illness.

Australia’s achievement should not be understated. The Australian Institute of Health and Welfare found that only 5.6 per cent of Australians aged 14 and over smoked daily in 2025, down from 19.5 per cent in 2001.

Approximately 1.3 million Australians were daily smokers in 2025, compared with three million in 2001.

Those figures demonstrate that Australia’s combination of taxation, education, advertising restrictions, plain packaging and changing social attitudes has worked.

Tobacco nevertheless remains the country’s second-leading contributor to the burden of disease. It causes cancers, cardiovascular disease and chronic respiratory conditions. Making cigarettes substantially cheaper therefore carries a real public-health risk.

That is the strongest argument against the Coalition’s proposal.

But a tax can eventually reach a point where it changes the source of supply rather than eliminating demand.

When a legal packet costs approximately $50 while an illegal packet can reportedly be purchased for $15 or $20, the incentive to evade the law becomes enormous.

The Coalition says excise accounts for more than $30 of the price of a standard packet of 20 cigarettes. Its proposed reduction would bring that component down to a little over $6. The new rate would be reviewed after two years. Coalition policy announcement

That is not a minor tax adjustment. It is an attempt to restore a legal market by destroying the illegal market’s price advantage.

The black market is no longer anecdotal

The existence of illicit tobacco cannot reasonably be dismissed as an industry talking point.

The latest national household survey found that 34 per cent of people who currently smoked reported recently using illicit tobacco in 2025. That was more than double the 16.7 per cent recorded in 2022–23.

Among those purchasing branded illicit tobacco, 57 per cent said they had bought it from a tobacconist.

This indicates something more serious than cigarettes occasionally brought home in a traveller’s luggage. It suggests an accessible retail market operating openly enough for ordinary consumers to find it.

The same survey found that cost remained the most common reason smokers gave for quitting or reducing their consumption. This confirms that price remains an effective health instrument—but also helps explain the demand for cheaper illegal alternatives. Australian Institute of Health and Welfare

Law-enforcement operations reveal the scale behind that retail trade. In August, federal investigators alleged that approximately 88 air-cargo consignments of illicit tobacco had been imported through one operation since May. Other investigations have involved cash smuggling, money laundering and multimillion-dollar tobacco supplies. Australian Federal Police

The problem extends beyond lost tax revenue.

An illicit tobacco customer does not merely avoid excise. The purchase may help finance organised criminal groups involved in extortion, money laundering, drug trafficking and violence.

Australia has also witnessed a succession of suspicious fires and attacks connected with competition for the illegal tobacco trade.

The high price was intended to punish consumption. It is increasingly rewarding those prepared to break the law.

Would an 80 per cent reduction go too far?

Recognising that the present model has become dysfunctional does not automatically make every proposed remedy correct.

An 80 per cent excise reduction is enormous. It could make legal cigarettes significantly more affordable, weaken the financial incentive to quit and potentially expose lower-income households to greater tobacco consumption.

Health organisations are justified in demanding evidence that the proposed cure would not recreate the public-health problem Australia spent decades reducing.

There are also practical questions.

Would manufacturers and retailers pass the full tax reduction to consumers? How quickly would legal prices fall? Would illicit sellers cut their own prices further? How much revenue would initially be lost? Would a lower excise rate attract former smokers back to cigarettes?

The Parliamentary Budget Office modelling relied upon by the Coalition may estimate the effect upon prices and revenue, but consumer and criminal behaviour cannot be predicted with certainty.

The proposed two-year review is therefore essential—but Australia should not have to wait two years to discover whether smoking has begun rising again. Any change would require continuous monitoring of smoking rates, youth uptake, legal sales, illicit purchases, seizures and tobacco-related hospital presentations.

A smaller staged reduction could offer a more cautious test. Excise could be lowered progressively while enforcement is intensified, with further adjustments dependent upon independently measured results.

Enforcement alone has limitations

The alternative argument is that Australia should retain high taxes and simply enforce the law more effectively.

Better enforcement is certainly necessary.

More cargo inspection, intelligence sharing, financial tracking, prosecutions, asset confiscation and meaningful penalties could increase the risks faced by criminal suppliers. Governments must also be prepared to close retailers repeatedly found selling illegal tobacco.

But enforcement alone cannot erase a price difference of tens of dollars per packet.

Australia imports a vast volume of goods. Criminal networks need only a portion of illegal consignments to reach their destination to preserve an extremely profitable trade. Small products with high margins are naturally attractive to smugglers.

If demand remains and the profit is large enough, arresting one network can create an opening for another.

The difficult policy task is to reduce demand, narrow the illegal profit margin and increase the likelihood of detection at the same time.

None of those measures is sufficient alone.

The vaping contradiction

The Coalition also proposes legalising and regulating vaping and nicotine pouches.

Australia’s approach to vaping has produced its own contradiction. Governments sought to restrict access, particularly among young people, yet disposable vapes became readily obtainable through an illegal retail system.

Daily vaping remained at 3.6 per cent in 2025, while it was considerably more common among young adults. The AIHW found daily use among people aged 18 to 24 was 8.3 per cent.

Nicotine pouches have also entered the market. Some 8.4 per cent of people aged 18 to 24 reported using them during the previous year.

Regulation could impose manufacturing standards, ingredient disclosure, age verification and enforceable retail controls. It could also provide adult smokers with lawful alternatives to combustible tobacco.

However, commercial legalisation would have to avoid recreating the colourful, flavoured and youth-oriented nicotine market that attracted a new generation of users.

The objective should be harm reduction for existing smokers—not the creation of lifelong customers who had never previously used nicotine.

Governments became dependent upon tobacco revenue

There is another uncomfortable element in the debate.

Tobacco excise is described principally as a health measure, yet it also raises government revenue. As taxes increased, governments developed a financial interest in continuing to collect them.

That does not invalidate the health rationale. It does, however, create conflicting incentives.

If a tobacco tax becomes so high that legal sales collapse while illegal consumption expands, the government loses revenue without necessarily obtaining the expected health benefit.

The test cannot be how much tax is imposed on each legal cigarette. It must be whether total smoking and tobacco-related harm are continuing to decline.

A policy that looks severe on paper but is routinely avoided in practice is not strong regulation. It is failed regulation.

A decision between two genuine risks

Australia is not choosing between public health and organised crime as though only one matters.

Reducing excise too far could increase smoking, disease and pressure on the health system.

Leaving the current settings untouched could continue delivering customers and money to a criminal market that disregards every public-health safeguard.

Both outcomes carry costs.

The sensible response should combine a carefully calibrated reduction in the legal-illegal price gap with much stronger enforcement, regulated lower-risk alternatives, severe penalties for illegal retailers and transparent public reporting.

The Coalition deserves credit for acknowledging a failure that governments have been reluctant to confront. But it must demonstrate that the proposed 80 per cent reduction is based upon more than the understandable desire to make a dramatic break with the present policy.

The excise rate should be set at the level that produces the lowest overall harm—not the highest politically defensible tax.

The Times View

Australia’s tobacco-control policies helped drive daily smoking to historic lows. That is an important national achievement and must not be casually discarded.

But success in the past does not prove that every subsequent tax increase remains effective.

The rapid growth of illicit tobacco is evidence that the policy has passed a critical point. Too many smokers are no longer responding to higher prices by quitting; they are responding by buying outside the legal system.

The Coalition’s proposed 80 per cent reduction may be too abrupt, but maintaining the status quo is no longer a credible policy.

Australia should consider a staged excise reduction accompanied by an uncompromising assault on illegal importers, criminal financiers and retailers. The results should be measured against smoking prevalence, illicit use and public harm—not government revenue alone.

Taxation is an instrument of policy. It should never become an article of faith.

When a tax enriches organised crime faster than it changes behaviour, the responsible course is not to defend it automatically.

It is to reform it.