By Shane Wright
A collapse in tobacco excise has blown a $31 billion hole in the budget bottom line as new documents reveal the federal Treasury was unprepared for the financial fallout caused by vaping and a surge in black market cigarettes.
Tobacco tax collections, which have been used by both sides of politics to paper over the nation’s finances, are falling at such a rate that they threaten the assumptions to be used by the government and opposition to fund their election campaign promises.
The budget bottom line has suffered a $31 billion hit from over-estimates of tobacco excise.Credit: Quentin Jones
As recently as 2021-22, tobacco excise was the federal government’s fourth-largest source of revenue, with only personal income tax, company tax and the GST collecting more.
Next week’s budget will confirm it is the seventh largest, with duty on alcohol raising more money for Canberra than cigarettes.
This financial year, tobacco excise is expected to bring in around $8.8 billion – a drop of 42 per cent on what was expected when Treasury first made its forecast in the 2021-22 budget. In the December mid-year budget update, Treasury slashed its already downgraded tobacco tax collection forecast for this year by almost $3 billion.
A crackdown on smuggled cigarettes introduced by the Morrison government in 2019 on top of a string of large excise increases was expected to drive up tobacco tax collections beyond $17 billion in a single year.
Instead, every year since then, collections have fallen short of what had been forecast. The cumulative shortfall is at $31 billion despite the excise rate climbing by 25 per cent since Anthony Albanese came to power in 2022.
Treasury documents released under FOI show the vast shortfall between the revenue forecast and what was ultimately collected is due to the department failing to take into account key ways that smokers would respond to higher prices.
The documents, from 2023, reveal Treasury officials examined key assumptions underpinning the economic models used to determine price increases and what this did to excise collections. At the time, tobacco excise collections were falling short of the department’s forecasts.
They confirm Treasury’s assumptions failed to consider other factors that may affect “official” smoking rates and the revenue expected to flow to the federal government.
The most important missing element is so-called “substitution effects – whether people may switch to vaping and/or the impacts of the black economy”.
Also missing are the possible impact of the changes on consumer behaviour such as hoarding cigarettes before a policy change, whether people quit altogether or scale back smoking, or if fewer people start smoking altogether.
Australia’s tobacco smoking rates are at record lows, down to 8.3 per cent of the adult population in 2022-23, but vaping has risen sharply among young adults, while a growing number of smokers have said they purchase tobacco products without plain packaging. The average price of a pack of cigarettes is more than $50.
Sydney University senior lecturer Ed Jegasothy said Treasury had long acknowledged that higher prices for tobacco could drive an increase in the illegal cigarette trade, but never sought to properly understand its impact on tax revenue.
He said the revenue forecasts produced in 2023 and used to support three increases of 5 per cent in tobacco excise were illusory.
“The massive shortfall we have seen in tax revenue over recent years demonstrates just how faulty these models and their underlying assumptions are,” he said.
“To my knowledge, the government has never evaluated the effectiveness of the tobacco tax in reducing rates of smoking in the population – the primary justification for these policies.”
Deakin University criminology senior lecturer James Martin said the increase in excise plus the government’s ban on consumer vapes had created a multibillion-dollar opportunity for organised crime.
Last week, the Australian Tax Office, Border Force and Victoria Police destroyed more than 16 tonnes of illegal tobacco, with an estimated excise value of $35 million, which had been found on a property in central-north Victoria.
The tax office and Border Force’s joint illicit tobacco team has, between mid-2018 and mid-2024, found and destroyed 253 hectares of tobacco crops and 21.8 million illegal cigarettes.
“By overly restricting the sale of legal, regulated nicotine, consumers have had little choice but to turn to the black market,” Martin said.
“This has led to disastrous, sometimes fatal consequences, including more than 200 arson attacks around the country as a result of rival organised crime groups fighting for control of the market.”
A spokesperson for Treasurer Jim Chalmers said tobacco tax receipts were routinely updated.
“These updates consider the latest available information around excise collections data and the outlook for tobacco volumes – including changes in demand due to number of people smoking, substitution or changes in policy,” they said.
The government is putting $157 million into law enforcement agencies to target the tobacco black market.
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