Invest1 publisher2 min readPublished
Australia's tobacco excise is losing its base to an A$8.5bn illicit market
Australia's tobacco excise take has more than halved from its A$16bn peak in 2020 as illicit product took about 55% of the market. With the Treasury forecasting about A$2bn by 2030, the government's case for keeping prices high now rests on health results alone.
The Investor · Invest desk
What happened
- A legal pack of cigarettes in Australia now costs about A$60, the highest price in the world, and more than 70% of that price is tax.
- Government data show the smoking rate among Australians aged 14 and over fell to 5.6% in 2025 from 8.3% in 2023.
- Last month the Senate concluded the illegal market had reached a tipping point and recommended halting further increases and cutting rates significantly.
- Illicit sales have spread online and into pop-up shops and barbershops, outside established distribution channels, the Financial Times reported.
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Why it matters
- cost On the Treasury's own forecast, the Commonwealth collects about A$14bn a year less from tobacco by 2030 than at the 2020 peak, money it must raise elsewhere or not spend.
- decision Keeping rates leaves enforcement as the government's only answer to the illicit share; the alternative is the Senate's cut, a bet that a cheaper legal pack wins buyers back.
- contradiction The government scores the policy on smokers, down about a third in two years, while the wastewater count of nicotine went up, so the same tax reads as a win or a failure depending on the figure chosen.
Excise revenue is the tax on each pack multiplied by the number of packs sold legally. A pack that cost roughly A$20 at the end of 2016 [8] now carries more than A$42 of tax [2]. Receipts still more than halved after 2020 while the price kept climbing [12][1], so the number of legally taxed packs fell faster than the tax on each one rose [9]. Legal product is now about 45% of the market [3].
Spending on illegal cigarettes and vapes is estimated at about A$8.5bn a year [5]. That is more than the government raised from tobacco excise in 2025 [6]. The illicit figure includes vapes, so the comparison is not exact.
The health figures cover different things over different years. The smoking rate is a share of people aged 14 and over, compared between 2023 and 2025 [9]. The Australian Bureau of Statistics nicotine estimate is drawn from wastewater and runs from 2017 [10]. The report attributes the rise in nicotine to illicit consumption, citing analysts it does not name [11].
If rates hold and enforcement, stepped up since 2024 [14], shrinks the illicit share, legal volume and receipts recover. If rates hold and enforcement fails, receipts follow the Treasury's forecast down [13]. The third possibility is the Senate's recommended cut [6], which the Liberal Party and One Nation also want [7]. A cheaper legal pack would narrow the price gap that sent buyers to illegal product in the first place [3].
That cut has a ceiling. If the 55% share is measured in packs [4], moving every illicit pack back into legal shops would multiply the legal base by about 2.2, so the tax per pack could fall by up to 55% with revenue unchanged [7]. That holds only under full recapture. A partial return supports a smaller cut.
I think the budget already assumes the second path. A Treasury forecasting a continued slide in receipts [13] is not counting on enforcement to rebuild the legal base. The counter-case is the government's own: excise exists to cut smoking, and smoking fell [8]. That case gets stronger if the wastewater count turns down. The view that the tax is shrinking its own base is wrong if the regulator's next estimate puts the illicit share below 55% while receipts stop falling [4].
What to watch
- The tobacco regulator's next illicit-market estimate: a share below 55% alongside steadier excise receipts would undercut the case that the tax is shrinking its own base.
- Whether the government takes up any part of the Senate's recommendation to halt increases and cut rates, and how large a cut it puts forward.
- The next ABS wastewater reading on nicotine, to see whether total consumption is still rising under the enforcement push that began in 2024.