Illegal cigarettes: Cut the price of cigarettes
One of the country’s largest independent retailers has warned that nine in 10 cigarettes will be bought illegally by the end of this decade unless the federal government cuts tobacco tax and reduces cigarette prices by almost a third.
Ritchies IGA, which operates 150 stores mostly in Victoria and NSW, says Treasurer Jim Chalmers can repair the budget by billions of dollars and undermine criminal gangs by reversing years of bipartisan support for ever-higher tobacco tax rates.
The government’s commissioner for illicit tobacco and e-cigarettes estimates that one in two cigarettes purchased in Australia is now illegal and smokers are missing out on $11.8 billion in excise tax.
At the beginning of the decade, the tobacco excise tax, the federal government’s fourth-largest tax source, collapsed. This year, the tobacco excise tax is expected to increase by $5.5 billion, compared to the original estimate of $13.6 billion in the 2025-2026 fiscal year made in early 2022.
Analysis by Oxford Economics, commissioned by Ritchies, estimates that the reduction in consumption tax will cost the budget $67 billion between 2018-19 and 2028-29, when the government announced restrictions on tobacco imports.
By 2028-29, if the government continues to increase excise taxes due to inflation, total collections that year could be just $1.5 billion, and nearly 90 percent of all cigarettes could be purchased on the black market. Four years ago, it was estimated that the excise tax collected in 2028-29 would raise $16 billion.
Oxford recommends reducing consumption rates to 2019 levels and then freezing them until the legal cigarette market stabilizes. This would reduce the price of a legal pack of cigarettes by almost a third.
With tougher penalties for businesses found selling illegal cigarettes and a crackdown on imports, Oxford predicts the legal cigarette market will rebound and excise duty will rise by $3.1 billion in 2028-29. The report predicts that overall smoking rates will decrease due to all the measures combined.
Revenue from tobacco sales at some Ritchies stores has fallen by 92 per cent since 2020-21.
Ritchies manager and CEO Fred Harrison said that the current regulation harms the budget and that the tobacco tax has now become a financial, moral and legal problem.
“We all know the consequences for our health system, our police and our communities are dire, but this report shows that the impact on the budget is just the same,” he said.
“On the current trajectory, by the end of this decade, nine out of every 10 cigarettes smoked in this country will be imported, supplied and sold by a criminal gang, not a legitimate retailer.”
Oxford estimated that a major cut to official excise tax would reduce illicit tobacco consumption by almost 50 percent.
There is deep resistance within the federal government to cutting the tobacco tax due to fears that it cannot be reduced enough to persuade illegal smokers to switch to legal products. Modeling of the idea has been completed in recent years, indicating that this is a high-risk strategy.
Last year, NSW Premier Chris Minns called on the government to consider cutting consumption tax, but Finance Minister Jim Chalmers rejected the move.
“I’m not convinced that reducing the excise tax on cigarettes will mean that this will be the end of illegal activity,” he said.
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
