By Shane Wright
A $25 billion hole has been blown in the federal budget since 2019 due to a collapse in tobacco excise, prompting calls for the federal government to reverse years of ever-increasing taxes on cigarettes or risk driving more people into buying from the black market.
Amid Victoria’s ongoing criminal black market tobacco war and signs it is spreading to other parts of the nation, figures contained within the just-released final budget outcome show excise on cigarettes has collapsed to its lowest level in a decade despite huge tax increases.
When the first forecasts for tobacco excise in the 2023-24 financial year were released, by then-treasurer Josh Frydenberg in 2020-21, the government expected to raise $15.3 billion in revenue. It was the government’s fourth-largest tax after income tax on individuals and companies, and the GST.
Instead, the final budget numbers for 2023-24 showed tobacco excise collected just $9.7 billion, a shortfall on the original forecast of $5.6 billion.
Independent economist Chris Richardson said it appeared the balance between the tax level on cigarettes acting as a disincentive to smoking or an incentive to buy black market cigarettes had been irrevocably broken.
“I have no problem with tobacco being taxed heavily on public health grounds but at a certain point, the revenue impact outweighs the public health impact and you starting waving a great big green flag for people to use the black market,” he said.
The $5.6 billion difference between the original excise forecast and what finally filled Canberra’s coffers was the sixth consecutive annual shortfall since the Morrison government revealed major changes to tobacco taxing arrangements, which promised to deliver an ongoing budget windfall.
Those changes, plus higher excise rates, were forecast to help raise almost $82 billion in total tobacco excise by 2023-24. Instead, the government collected $65.5 billion while forecasts for future excise collections have been written down another $9.5 billion.
The shortfall could have been larger.
In last year’s budget, Treasurer Jim Chalmers revealed plans to increase tobacco excise by 5 per cent a year for three years on top of ordinary indexation in a move expected to “encourage smokers to quit”. The change would also deliver the budget an extra $3.3 billion by 2026-27 including an additional $320 million in 2023-24.
According to James Martin, a senior lecturer in criminology at Deakin University, the ever-increasing excise has just forced a growing number of smokers to seek out illicit tobacco.
With cigarettes now costing at least $50 a pack, a heavy smoker faces an annual tobacco bill of $18,000 to maintain their habit. But with the black market offering cigarettes at just a fraction of the cost, many Australians are simply seeking out retailers willing to offer illicit goods.
“You can’t just keep pouring fuel on this fire that leads straight to the black market,” he said.
The Australian Taxation Office estimates that despite a fall in the total tobacco market and growing seizures of illicit material, the amount of illegal tobacco is growing and now makes up at least 15 per cent of the national market.
Martin said while governments talked up their ability to stop illegal cigarettes and vapes from entering the country, black marketers were simply increasing the amount they tried to bring into Australia.
He said because there was now an overwhelming financial incentive for people to source their cigarettes from an illegal source, the government had to look at cutting tobacco excise while also ramping up surveillance of retail outlets.
“I think what they need to do is cut taxes on cigarettes, bring vapes into the legal market and go with significant law enforcement,” he said.
The Nationals have argued that vapes should be taxed the same as cigarettes and have heavy restrictions on their sale, with the extra revenue funnelled into regional health, education and housing.
But the government has ruled that option out. Health Minister Mark Butler has cited evidence from New York where despite vapes being brought into the tax system, little revenue had been raised while vaping rates have increased.
Sydney University senior lecturer in public health, Ed Jegasothy, said tobacco had been one of the first items to be taxed by governments in Australia, but the rationale to reduce smoking rates only emerged in the early 1990s.
He said large increases in tobacco excise had been introduced by every government since 2010 in the name of reducing smoking rates. However, the policies had not been shown to be effective.
In reality, tax increases had boosted the budget bottom line, with unknown health impacts.
The latest tobacco excise figures, alongside the surge in black market activity, proved the current situation was untenable.
“It’s distasteful and it’s politically difficult, but there needs to be serious consideration of whether tobacco policy should go in a different direction, and whether taxes should be cut,” he said.
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