New research released by one of Australia's biggest retailers reveals the scale of revenue being lost to the booming illicit tobacco industry.
Instead, the high costs associated with legal tobacco are driving smokers towards untaxed, unregulated illicit products.
Forecasts show $5.5 billion in tobacco excise is expected to be collected in 2025-26, down from $16.3 billion in 2019-20. Based on the current trajectory of growth in the illicit market, federal excise in 2028-29 could plummet to $1.5 billion (chart 1).
"On the current trajectory, by the end of this decade, nine in every ten cigarettes smoked in this country will be imported, supplied and sold not by a legal retailer, but by a crime gang," Fred Harrison, CEO & Ritchies Director said.
"We all know that the consequences for our health system, police and communities are dire, but what this report shows that so too is the budget impact.
"For the amount lost on tobacco excise, we could keep capital gains tax discount in place without hurting mum and dad investors while the government looks for ways to rein in savings."
The research, commissioned by Ritchies IGA, shows that cutting excise to 2019 levels would support significant gains from the illicit market when paired with stronger enforcement.
It models a far more stable revenue profile if the 2019 excise rate was reinstated (chart 1) and would deliver $3.1 billion boost to revenue over the forward estimates, reaching $4.65 billion by 2028-29.
Modelling also reveals a 46.8% drop in demand of consumption of illicit tobacco on 2026 levels (chart 2), and a drop in the illicit market share of more than 25% - from 64% to 37.1% (chart 3).
"We have the mad situation at the moment where the government is floating new house and death taxes, but not plugging the taxation hole which is being created by illegal tobacco," Mr Harrison said.
"There can be two truths here. Either the Government is so flush with cash that it needs no new taxation revenue and can leave $67 billion in tobacco taxes on the table, or it's not.
"Based on this research, the answer to every proposed new tax floated in the lead up to the 2026 budget should be 'what about fixing the illegal tobacco crisis first?'
"This has gone from a policy and health issue, to a financial, moral and legal one."
Chart 1: Simulated forecast effect on excise revenue under the 2019 excise rate
Note: 2025-26 assumes no excise change, only a legal uplift from enforcement. The 2019 excise rate is factored in from 2026-27 onwards.
Source: Oxford Economics
Chart 2: Simulated forecast effect on illicit consumption under the 2019 excise rate
Note: 2025-26 assumes no excise change, only a legal uplift from enforcement. The 2019 excise rate is factored in from 2026-27 onwards
Source: Oxford Economics
Chart 3: Simulated effect on tobacco consumption under the 2019 excise rate
Note: 2025-26 assumes no excise change, only a legal uplift from enforcement. The 2019 excise rate is factored in from 2026-27 onwards
Source: Oxford Economics
