How Australia’s tobacco excise has led to a black market

Cigarette butts in a makeshift ashtray in a cement block. Picture: Joel Saget / AFP

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Australia has long been known as the lucky country, but the stupid country is becoming a more accurate description.

With such a rich array of incriminating evidence, it’s hard to know where to start, but the collapse in tobacco excise, and the destructive response to it, must stand as a classic example.

A government that’s mulling a damaging tax on unrealised capital gains in superannuation – which might raise a few billion dollars in revenue over the coming years – has presided over a far larger collapse in tobacco excise, making the prospect of broader tax cuts even less likely.

Tobacco excise peaked at $16.3bn in the 2020 financial year, before it began to fall sharply: $14.2bn in 2021, then $12.6bn in 2022. This financial year the expected haul is $7bn, despite massive population growth, including from India and China, where smoking rates among adults are about triple Australia’s.

For years it’s been obvious that the absurdly high level of excise on cigarettes – which has roughly tripled since 2015 to about $1.40 a stick, or $28 a packet – has been fuelling a black market and enriching criminal gangs who fight over turf and torch shops that refuse to sell their product.

In Victoria alone more than 100 shops have been firebombed over the past year and a woman was even tragically killed in January in Melbourne in an apparently mistaken arson attack. On practically every corner of our major cities, cigarettes (in normal, branded packaging) are available for between $16 and $20 a packet, about a third of the price of the legal product.

“Do you have the cheap ones?” “Of course” is normally the answer before the shop assistant reaches under the table for the standard laminated price list. Quite aside from the financial stupidity, smoking rates must have increased significantly. So what has been the government’s response to this wholly predictable health and financial loss?

In the 2024 budget, Treasury wrote it would “encourage smokers to quit by raising tax on tobacco by 5 per cent per year, for three years from September 1, 2023”, adding that the increase would boost receipts by $3.3bn, just as those receipts were collapsing even further. To be clear, after observing multiple years of tumbling revenues, caused by excessive excise, the Treasury’s response was to increase excise further. In a week when many have paid tribute to the late, great former Treasury secretary John Stone, it’s a stark reminder of how much the nation’s supposedly premier economic agency – whose head is paid more than $1m a year – has fallen.

Tobacco excise is a shockingly regressive tax that serves mainly to punish addicts.

Even in supposedly “far left” California, where smoking rates are lower than Australia’s, tax on a pack of cigarettes is no higher than $US2.87, about 20 per cent of what is levied in Australia. But given a choice between gratuitous sin taxes and higher income tax, or a tax on unrealised capital gains, the former is less harmful to economic growth and entrepreneurship.

Last month, NSW Premier Chris Minns sensibly called for a reduction in tobacco excise to undercut the business model of criminal organisations – a rational response that would increase tax revenue and could even reduce smoking rates if some of the gangs give up competing. But no, Treasurer Jim Chalmers said, the government would prefer to spend hundreds of millions of dollars it doesn’t have on additional “enforcement”. And the economic ignorance extends far beyond tobacco. Embarrassingly, Health Minster Mark Butler was crowing about the latest seizure of vapes last week, even as they remain readily available and widely used.

While the excise debacle deserves wider ridicule, what really prompted this week’s column was news that the government is poised to bail out Australian smelters with borrowed money. Of course, this comes after putting them out of business by ever higher energy costs, courtesy of the costly “net zero” delusion.

Moral grandstanding has become the driving force behind Australian policymaking rather than traditional cost-benefit analysis. We’re OK with other nations burning ever greater quantities of our coal and gas, but we don’t want to do it here. We’re building LNG import terminals outside Sydney and Melbourne, despite sitting on some of the world’s largest gas reserves.

Former Treasury secretary John Stone.

The greenhouse gas emissions generated to make the imported manufactured goods Australians voraciously consume aren’t counted in our emissions tally, as any honest reckoning would.

We had a federal election where neither major party dared promise to rein in the NDIS, whose cost ($52bn this year, rather more than the $14bn forecast in 2011) is poised in a few years to overtake that spent on national defence.

The Productivity Commission said the NDIS would be “for people with a significant and permanent disability who need lifetime care and support”. In March, 717,000 people were beneficiaries, up from 535,000 less than three years ago.

No wonder the Centre for Independent Studies estimated this week that about half of voters were largely dependent on government for their income via welfare payments salaries or subsidies.

Our living standards have fallen faster than almost any other OECD nation over the past few years, and that’s as prices and demand for our commodity exports remain high. Then, we’ll be losing a lot more revenue than just tobacco excise, and the stupidity of the past few years might finally be acknowledged.

Adam Creighton is chief economist at the Institute of Public Affairs.