The federal government is under pressure to reduce the tax on cigarettes, with critics arguing the "unpalatable" policy shift is needed to rein in a black market spiralling "out of control" and robbing taxpayers of billions of dollars in revenue.
It comes after the New South Wales government became the last state to announce a licensing regime for tobacco retailers, seen as a crucial step towards quantifying the scale of the illicit trade and controlling the supply chain.
At more than $1.30 per stick, Australia has one of the highest tobacco excises in the world, pushing the average price of cigarettes above $50 a pack. Illegally imported — and untaxed — cigarettes are now widely available and sell for about half that price.
According to the Australian Institute of Health and Welfare (AIHW), almost a quarter of people who smoke have used unbranded tobacco — a figure that has increased since 2019.
The huge demand for cheap cigarettes has sparked a turf war in Victoria, where rival gangs vying for control of the black market have torched 105 tobacco stores in the past 18 months.
It appears to be spreading across the border into South Australia, which has so far recorded 17 firebombings.
It's a problem that's "out of control", according to Llew O’Brien, a Nationals MP who represents the Queensland seat of Wide Bay, where two tobacco shops have recently been targeted by arson attacks.
Mr O'Brien — who served as a police officer before entering federal parliament — said the ever-increasing tax was well-intentioned, but it's had the unintended consequence of fuelling a black market, a claim backed by some criminologists and economists.
For the first time, the Nationals MP has broken from a longstanding bipartisan approach to the tax to call for a reduction.
"We need to at least look at reducing excise and consider whether that will help get this under control," Mr O'Brien told the ABC.
“Whilst this is unpalatable, I think we need to direct people back to the legal market.”
Cigarettes purchased under-the-counter, he says, are funding organised crime.
Queensland Liberal MP Warren Entsch agrees that a reduction in the tobacco excise is needed "to break the business model of the illegals".
He says shops selling illegal cigarettes are popping up in Cairns, in his electorate of Leichhardt, and he often sees people queued up outside these outlets.
"It's quite blatant," he said.
Mr Entsch says legitimate retailers are going broke because they cannot compete with stores openly selling under-the-counter products for half the price. The excise alone on a $50 pack of cigarettes is worth about $33.
"The first thing I would be doing is reducing [the tax] back to a point where people will go to legitimate traders rather than illicit traders," Mr Entsch told the ABC.
"If you think you're going to tax yourself out of this problem, you've got to be kidding."
Tobacco tax hikes 'no longer working'
Smoking tobacco is harmful and, according to the AIHW, it's the leading cause of preventable illness and death in Australia each year, placing a multi-billion-dollar burden on the health system.
Both major parties have used successive and steep increases to the tobacco excise as a tool to help drive down smoking rates while also boosting the budget bottom line.
[excise graph]Despite the significant tax increases, the tax revenue has collapsed from a peak of $16 billion in 2019/20 to $9.8 billion in 2023/24 — a fall of 39 per cent in four years.
The latest federal budget papers reveal last year's tax take from tobacco was $5.6 billion short of Treasury’s original forecast.
According to economist Chris Richardson, the shortfall in the tax collected at the same time that the tax rate went up, taken a face value, would suggest there's been a 55 per cent decrease in smoking the past four years, which has "almost certainly" not happened.
[smoking rates graph]Instead, he said, it shows there's a "rapidly growing" group of smokers shifting to the black market and buying their cigarettes tax-free.
"Reading backwards from the official numbers, the use of illegal tobacco in Australia has absolutely roared in the last handful of years," he said.
The Albanese government is part-way through a three-year phase of increasing the excise by an extra 5 per cent a year, on top of the regular indexation, as part of a plan to lower adult smoking rates to 5 per cent by 2030.
But Mr Richardson said the tax is "no longer working" and should be frozen at its current level, for now.
"We certainly shouldn't press harder on the tax lever for a while, at least until enforcement catches up with what we've done on tax," he said.
"We've overworked one element of the mix, the tax, and underdone the enforcement side of it, and those two need to be in better sync with each other."
The tax rate is a highly contentious issue.
The Cancer Council says the price of cigarettes is still the single-biggest reason why people quit smoking, and that the prevalence of smoking will continue its downward trend in Australia, while the excise continues to rise.
"The price of tobacco remains a key factor in helping reduce the appeal of smoking, preventing new generations from starting and motivating people who currently smoke to quit," said Alecia Brooks, chair of the Cancer Council's Tobacco Issues Committee.
Smoking rates in Australia have halved in the past 20 years and Ms Brooks said this had been achieved through "world-leading plain packaging laws" and other measures including "tobacco excise increases".
However, others have questioned whether the fall in smoking rates can be directly linked with rise in the excise, and point out that smoking rates have remained highest among First Nations Australians and low-income earners, meaning it's these groups bearing the brunt of the tax hikes.
More than a billion illegal cigarettes seized
As demand has grown, the number of illegal cigarettes being seized and destroyed by the Illicit Tobacco Taskforce has skyrocketed from 400 million in 2018, to 1.4 billion last year.
The Australian Tax Office, which is part of the multi-agency taskforce, estimates the black market is about 13 per cent of the total market, which means $2.3 billion is being lost in excise each year.
The industry believes it's far higher and points to research it commissioned, through FTI Consulting, suggesting illicit consumption made up almost a third of all tobacco consumed in 2023.
While independent and up-to-date data is hard to find, the government acknowledges there's a problem and recently appointed an Illicit Tobacco Commissioner to better coordinate efforts with the states to clamp down on the black market supply chain.
If elected, the Coalition is promising to go further and significantly expand the taskforce, pouring an extra $250 million from the excise into law enforcement. But neither major party is entertaining the idea of tinkering with the tax.
As a Nationals MP, Mr O’Brien backs his party's approach but believes the tobacco excise must be part of the solution.
"Yes it would take a brave government," he said, acknowledging the political risks.
"But we're sticking our head in the sand if we keep going the same way we're going and pretending [the problem] doesn't exist."
The Nationals are the only major party that still accepts political donations from the tobacco industry, with British American Tobacco and Philip Morris giving a combined $130,000 to the party, via an associated entity, in 2022/23.
