One of the easiest arguments to make against reducing Australia’s tobacco excise is that it would be a gift to Big Tobacco. It sounds compelling: tobacco companies sell cigarettes, lower taxes could mean cheaper legal cigarettes, and cheaper cigarettes could mean more legal sales. Therefore, tobacco companies benefit.
There is some truth in that, but it is also far too simple for the Australia of 2026. The real question is not whether tobacco companies might gain something from excise reform. They might. The real question is whether the current policy is still reducing harm or whether it is transferring an enormous market from regulated businesses to organised crime while government revenue collapses. That is a much less comfortable debate, but it is also the one Australia now needs to have.
To understand who would benefit from an excise reduction, it helps to understand how the system actually works. Australia does not impose tobacco excise as a percentage of a cigarette company’s profits or the final retail price. It applies a fixed amount to every legal cigarette stick, with loose tobacco and heavier products taxed by weight.
There is currently no legal tobacco manufacturing in Australia, so most legal tobacco enters the country as an import. Technically, imported cigarettes incur excise-equivalent customs duty rather than domestic excise, but the rates are designed to be the same. The practical effect is that the importer must pay the duty to the Commonwealth before the tobacco can enter the Australian market. The tax is therefore embedded in the cost of the product before it reaches a wholesaler, retailer, or consumer.
From 3 March 2026, the duty on a standard cigarette containing no more than 0.8 grams of tobacco was $1.53 per stick. That means a packet of 20 carried approximately $30.57 in tobacco duty before the manufacturer’s price, transport and distribution costs, wholesale and retail margins, and GST were taken into account. A packet of 25 carried about $38.21 in duty, while a packet of 30 carried about $45.85. The tobacco and packaging may cost relatively little to produce, but the legal product reaches the shelf carrying an enormous tax liability.
Loose tobacco, most cigars, and other products not covered by the standard per-stick category are taxed by tobacco weight. As of March 2026, the applicable rate was $2,445.26 per kilogram of tobacco content. The government has also been changing the “equivalisation weight” used to align the taxation of roll-your-own tobacco with manufactured cigarettes, reaching 0.6 grams per cigarette equivalent in September 2026. The intention is to stop smokers from avoiding part of the tax by switching from factory-made cigarettes to loose tobacco.
The rates do not remain fixed. They are indexed in March and September according to movements in average weekly ordinary time earnings, meaning the duty tends to rise with wages rather than merely keeping pace with consumer-price inflation. The government also imposed an additional five per cent annual increase in September 2023, 2024, and 2025. Each increase raised the amount payable on every legal cigarette regardless of its brand, production cost, or wholesale price.
GST is also included in the final retail price. Because the duty is already built into the price moving through the supply chain, the GST-inclusive shelf price reflects the excise as well as the commercial value of the product. Retailers then set the final price after accounting for their wholesale cost, operating expenses, and margin.
A simplified legal packet therefore contains several components: the manufacturer or importer’s underlying price, tobacco duty, distribution costs, wholesale and retail margins, and GST. The tobacco company does not currently receive the full shelf price, and it certainly does not receive the excise. That money is paid to the Commonwealth.
The illicit product operates under a completely different system. A smuggled cigarette attracts no customs duty because its importer conceals it from authorities. It incurs no tobacco excise, passes through no compliant wholesale chain, and often avoids GST as well. Its supplier begins with a cost base that may be more than $30 lower per packet of 20 before any other differences are considered. That enormous gap creates room for an illicit seller to undercut the legal market while still earning a substantial profit.
This is why excise has become so attractive to organised crime. The criminal supplier does not need to manufacture a dramatically cheaper product or operate more efficiently than a legal business. It only needs to evade a tax of more than $1.50 per cigarette. The higher the duty rises, the larger the potential reward for avoiding it becomes.
It also explains why cutting excise would not automatically hand the reduction to Big Tobacco. Suppose the government reduced the duty by 50 cents per cigarette. The importer’s tax liability would fall by $10 on a packet of 20. If the retail price also fell by $10, the immediate financial benefit would go overwhelmingly to the consumer, not the manufacturer. If the manufacturer increased its wholesale price by $2 and the shelf price fell by only $8, the company would capture part of the reduction. If the retailer retained another dollar, the benefit would be divided again.
The final result would depend on how much of the reduction was passed through and how consumers responded. It cannot simply be assumed that every dollar no longer collected by the government becomes a dollar of tobacco-company profit. That assumption ignores the rest of the supply chain and confuses reduced tax liability with increased corporate revenue.
Manufacturers could also benefit by recovering legal sales, but those sales need to be interpreted correctly. If someone already smoking illicit cigarettes moved back to a legal packet, the tobacco company would regain a customer, but Australia would not have gained a new smoker. An existing purchase would have moved from an untaxed criminal supplier to a regulated business. The government would collect some duty rather than none, a legitimate retailer would receive the sale, and organised crime would lose the revenue.
A poorly designed reduction could allow manufacturers or retailers to retain too much of the savings. That is a risk the government can manage. Wholesale prices, retail prices, and margins could be monitored before and after any change. The reduction could be phased in, with later stages dependent on demonstrated pass-through to consumers and a measurable decline in illicit purchasing. Government could also use minimum-pricing rules to prevent predatory discounting while imposing additional levies or reversing the excise adjustment if companies captured an excessive share.
The system, therefore, matters enormously to the debate. Excise is not a payment made to tobacco companies, and reducing it is not automatically a subsidy. It is a change to a fixed tax embedded in every legal cigarette. Who ultimately benefits depends on pass-through, margins, and switching between legal and illicit suppliers, and those outcomes can be influenced by how the reform is designed.
What happened next would depend on how manufacturers, retailers, and consumers responded. If the reduction were passed through, legal cigarettes would become cheaper. If manufacturers or retailers retained some of it through higher margins, they would benefit directly. If people buying illicit tobacco returned to the legal market because the price gap had narrowed, legal tobacco companies would regain sales.
So yes, tobacco companies could benefit from an excise reduction, and any serious advocate of reform should admit that plainly. But honesty requires us to finish the analysis rather than stopping at the point that produces the most politically convenient headline, because the current policy also has beneficiaries. They simply do not publish annual reports, comply with product standards, or pay tax.
Australia did not arrive at extraordinarily expensive cigarettes by accident. Tobacco excise has been a central part of an extraordinarily successful tobacco-control program. Alongside plain packaging, advertising restrictions, smoke-free environments, public education and cessation support, higher prices helped make smoking less attractive and less affordable. For many years, the logic was sound: raise the price, reduce consumption, prevent initiation, and encourage quitting.
The problem is that taxes do not operate in a vacuum. When the legal product becomes prohibitively expensive while an illegal substitute remains dramatically cheaper and readily available, some consumers do not quit. They change suppliers.
In June, the Australian Bureau of Statistics released experimental estimates suggesting that illicit sources accounted for 80 per cent of the quantity of tobacco and nicotine products consumed in 2025, up from 12 per cent in 2017. The ABS estimated that total nicotine consumption had increased by almost 40 per cent over that period, while legal tobacco consumption fell to less than one-third of its 2017 level. Prices for legal tobacco had almost tripled since December 2016, the ABS found, while estimated illicit prices remained relatively stable.
The ABS was explicit that these estimates were experimental. They were constructed using wastewater measurements and assumptions about the mix and nicotine content of different products, so they should not be treated as the final word on how many Australians smoke or exactly how large the black market has become.
Other official evidence paints a less catastrophic picture. The Australian Institute of Health and Welfare’s 2025 household survey found that daily smoking among Australians aged 14 and over had fallen from 8.3 per cent in 2022–23 to 5.6 per cent in 2025. That continues a remarkable long-term decline from 19.5 per cent in 2001. The same survey found that about one in three people who smoked had recently purchased illicit tobacco or currently smoked it. That is an enormous proportion, but a long way from 80 per cent of smokers.
These figures are not necessarily irreconcilable. Wastewater estimates measure aggregate nicotine consumption, while household surveys measure self-reported behaviour. Heavy users account for more consumption than occasional users, and survey respondents may be reluctant to disclose illegal purchases. Meanwhile, wastewater modelling cannot perfectly distinguish products or the people using them.
The responsible conclusion is not that one dataset must be right and the other wrong. It is that smoking prevalence can be falling while a rapidly growing share of the remaining market moves outside the legal system. That is still a profound policy problem.
The ABS says evidence from multiple sources suggests consumers are shifting from legally purchased tobacco towards illicit supply, rather than the collapse in legal sales representing an equivalent decline in total consumption. The Illicit Tobacco and E-cigarette Commissioner separately estimated illicit tobacco at between 50 and 60 per cent of the market in 2024–25. Whatever the precise figure, the black market is no longer marginal.
The collapse in tobacco revenue tells the same story from a different direction. The Parliamentary Budget Office says high tobacco excise has contributed to a significant shift from legal to illicit consumption. Between the 2023–24 and 2026–27 budgets, the forecast for tobacco excise revenue in 2026–27 was revised from $14.7 billion to just $3.6 billion. That is an $11.1 billion downgrade for a single year, and the PBO now expects tobacco excise to halve as a share of the economy over the coming decade.
This is not merely a forecasting error. It is a policy alarm. Some of the revenue decline is desirable because when people quit smoking, excise receipts should fall. Tobacco tax should never become a revenue stream that the government needs smokers to sustain. But legal sales are falling much faster than smoking appears to be, which means a substantial portion of the missing revenue is not evidence of successful quitting. It is evidence that transactions have migrated beyond the tax system. Australia has not eliminated the market; it has changed who supplies it.
Critics of excise reform often speak as though maintaining exceptionally high taxes punishes tobacco companies and protects the public. But if illicit products replace legal sales, the most effectively punished parties may be compliant retailers, taxpayers, and consumers left dealing with an unregulated supply chain.
The criminal networks supplying illicit tobacco pay no excise. They follow no mandatory manufacturing standards, cannot be required to recall a defective product or disclose its ingredients, and have little incentive to verify age. Their earnings can also finance money laundering, drug trafficking, and other criminal activity. The Commonwealth has estimated that organised crime groups earn billions of dollars from illicit tobacco, while the illegal trade has been linked to extortion and a long-running series of arson attacks on tobacco shops.
The point is not to defend any particular company or industry. It is to recognise the practical difference between a regulated market and an illegal one. Legal suppliers can be taxed, licensed, inspected and held accountable through courts, product standards and consumer law; criminal suppliers operate beyond those controls. Acknowledging that distinction is simply recognising that pushing persistent demand outside the legal market does not make it disappear; it changes who supplies it and how much oversight the public retains.
A carefully calibrated reduction could narrow the gap between legal and illicit cigarette prices, encouraging existing smokers to return to regulated retailers without making cigarettes broadly cheap. Its success would depend on recovering legal transactions while preserving incentives to quit and preventing an increase in smoking initiation.
Price remains an important part of tobacco control, but the relevant price is now the one consumers actually pay. When illicit cigarettes are widely available for far less than legal products, reducing the legal price gap may strengthen regulation without abandoning the public-health gains achieved over recent decades.
The relevant price is no longer only the price of legal cigarettes. It is the price and availability of legal cigarettes relative to illicit cigarettes and other nicotine products. A tax can be highly effective while evasion remains difficult and illicit supply marginal. The same tax can produce diminishing benefits and growing criminal profits once illegal alternatives become cheap, familiar, and widely distributed. The question is therefore not whether tobacco taxation works in theory, but whether Australia has pushed it beyond the point at which further increases work as intended.
This is where the argument advanced by the Australian Council on Smoking and Health, Simon Chapman, and other orthodox tobacco-control advocates becomes unconvincing. ACOSH has portrayed excise reform primarily as a tobacco-industry campaign that would reverse decades of public-health progress, while Chapman has argued that lowering excise would “do nothing.” But this framing does not adequately explain how the present market actually works. It treats the price of legal cigarettes as though it remains the price confronting every person who smokes, when a large and growing illicit market allows consumers to evade that price altogether. The mistake is not opposing a crude or excessive tax cut; there are sound reasons to do that. The mistake is refusing to model substitution. Once consumers can choose between a heavily taxed legal product and a readily available untaxed substitute, another excise increase may reduce legal sales without producing anything close to the same reduction in smoking. ACOSH and Chapman remain focused on the historical relationship between legal prices and smoking prevalence, but the policy problem has changed: the relevant question is now how tax affects total consumption, supplier choice, and criminal profit across both the legal and illegal markets.
Political debate tends to collapse every alternative to the status quo into one alarming phrase: “cutting tobacco taxes.” But a large, unconditional cut is not the only option. One alternative would be a freeze, ending further real excise increases while ordinary inflation gradually narrows the gap between legal and illicit prices. Another would be a calibrated reset, in which excise was reduced to a level intended to recover part of the legal market, with the reduction linked to price controls, enforcement, and independently measured public-health outcomes. These policies should not be treated as interchangeable.
Australia’s tobacco excise is indexed twice a year to average wages. It also received an additional five per cent annual increase for three years from September 2023. Continuing automatic increases assumes the relationship between tax, price, and consumption still resembles the market for which the policy was designed. The latest evidence suggests it does not.
At a minimum, the government should pause further above-inflation increases and commission an independent review of how legal prices, illicit supply, smoking prevalence, nicotine consumption and excise revenue now interact. That review should model more than one outcome. It should ask what would happen to total smoking, not merely legal sales under a freeze, a modest reduction, and the current trajectory. It should also be insulated from both tobacco-industry influence and the institutional temptation to defend existing policy.
An excise reset could only be justified as one component of a broader strategy. The objective should not be to restore a thriving legal cigarette industry. It should be to shrink illicit trade while accelerating the disappearance of smoking.
Retail prices and industry margins would need to be monitored. If manufacturers captured a tax reduction without materially narrowing the illicit price gap, the policy would have failed. Minimum-pricing or anti-discounting rules could prevent companies from using ultra-cheap products to recruit new smokers.
Tobacco retailing should also be licensed nationally. Authorities need to know who is selling tobacco, impose enforceable conditions, and remove sellers who repeatedly deal in illicit products. Australia also needs a modern track-and-trace system that can follow legal tobacco through the supply chain. Enforcement should concentrate on importers, distributors, financial flows and organised networks, not merely occasional shopfront seizures.
The federal government has committed substantial funding to enforcement and proposed stronger penalties and investigative powers through the Combatting Illicit Tobacco Bill 2026. Those measures may help, but enforcement alone is unlikely to eliminate a market whose profit margin has been created by an extreme price difference. Most importantly, excise reform must be paired with a credible off-ramp from smoking.
The long-term goal should not be to choose whether cigarette companies or criminal organisations sell tobacco in Australia. It should be making combustible cigarettes progressively less relevant.
Smoking is uniquely dangerous because it involves inhaling the toxic products of combustion. No recreational nicotine product is harmless, but products that do not burn tobacco do not all present the same risk as cigarettes. Recognising that does not require a vaping free-for-all. Age restrictions, manufacturing standards, ingredient disclosure, child-resistant packaging, marketing limits, and serious penalties for sales to minors are essential. Emerging products such as nicotine pouches should be assessed on evidence, not automatically approved by industry or prohibited by reflex.
The incentive structure should be coherent. People who do not use nicotine should not start. People who smoke should be encouraged to quit smoking and nicotine entirely. Those who cannot or will not quit nicotine should find it easier to move away from combustion than to continue smoking. Those who supply illicit products should face a sharply increased probability and cost of detection.
Australia’s current system struggles to deliver that logic. Cigarettes remain legally available through ordinary retailers, while legal vapes are confined to participating pharmacies. Adults may purchase eligible vapes without a prescription, but only after a pharmacist consultation and with significant restrictions on flavour, presentation and nicotine strength.
Whatever one thinks of vaping, it is difficult to call a system coherent when the deadliest nicotine product is often easier to purchase legally than a non-combustible alternative. A risk-proportionate system would keep cigarettes tightly regulated and relatively expensive while making regulated, non-combustible substitutes sufficiently accessible and appealing to displace them. The aim would not be to normalise nicotine use, but to stop nicotine use from leading so predictably to inhaled smoke.
The claim that excise reform is simply a gift to Big Tobacco is powerful because it turns a difficult policy problem into a morality play. On one side stands public health; on the other stands the tobacco industry. Any policy that might benefit the latter can therefore be dismissed without examining its wider effects.
But public health is not a contest over which industry we dislike most. Its purpose is to reduce disease, death, and harm. If the current excise trajectory caused smoking to fall, illicit supply to remain marginal, and government revenue to decline only as people quit, the case for staying the course would be strong. That is not the market described by the latest official evidence.
Government can freeze further increases, conduct an independent review, strengthen enforcement, license retailers, monitor margins and improve access to regulated alternatives. If a carefully designed excise reset is then supported by evidence, it can be trialled against explicit measures including total smoking, youth initiation, illicit purchasing, legal prices, criminal activity, and tobacco-related disease. If those measures deteriorate, the policy should be reversed. If they improve, refusing reform simply to preserve the appearance of toughness would make little sense.
Cutting the tobacco excise could benefit tobacco companies. That is true. But maintaining a tax that no longer works as intended is already delivering an extraordinary gift to organised crime.
Policy should not be judged by whether every bad actor loses. It should be judged by whether fewer people smoke, fewer young people begin using nicotine, fewer consumers buy from criminals, and fewer Australians become sick or die.
If a calibrated excise reset combined with tougher enforcement, regulated lower-risk alternatives, and stronger cessation support performs better on those measures, considering it is not surrender. It is what evidence-based government is supposed to do.
Australia can no longer afford to confuse the appearance of toughness with the reality of harm reduction.
Alan Gor is right to remind us that the paramount aim of Australia’s response to cigarettes, tobacco and vapes should be reducing smoking-related deaths & disease. That can only be achieved by reducing smoking. As smoking is still the most important cause of preventable deaths in Australia as it28 is worldwide, health policymakers should try to reduce smoking as quickly as possible but also while taking care to minimise adverse unintended consequences of policy. The primary aim of Australia’s response to smoking should not be to harm tobacco companies. But it would be easy to draw the conclusion listening to advocates for conventional tobacco control that maximising damage to tobacco companies, or better still completely eradicating them, is really their paramount concern. Harm minimisation hasn’t been mentioned as a key principle in Australian tobacco control for more than a decade and a half even though it is explicitly endorsed in Australia’s National Drug Strategy and Article 1 (d) of the Framework Convention on Tobacco Control which Australia has signed and approved.
It’s a fair assumption that Australia’s cigarette excise has been and will be decided after building a computer model of cigarette sales vs retail cigarette prices. The British American Tobacco company submission to the recent Senate inquiry included a description of a computer model of Australian cigarette sales vs retail cigarette prices which was claimed to be astonishingly accurate. It would be naive to imagine that political factors won’t be taken into account. Victoria will have its next state elections on 28 November. The Victorian Labor government is well behind in the polls and seems likely to lose office. Crime and violence has been identified as the second most important issue for Victorian voters at present. Most Victorian voters will be well aware that sky high cigarette excise and the quasi prohibition of vapes has resulted in a booming and violent illegal market for cigarettes, tobacco and vapes. It would be very surprising if the Labor Federal Treasurer did not also take this into account.
The international tobacco industry has been extraordinarily profitable for about 100 years. Tobacco company shares have been among the best performing shares for much of the last 100 years. The industry employs about 100 million people to make and sell about five trillion cigarettes every year. Much of the tobacco is grown in very poor countries. The US tobacco industry lost a number of important legal cases and decided to settle with 46 states and some territories in the 1998 Master Settlement Agreement. This required several major US tobacco companies to reimburse the plaintiffs for the estimated cost of health care for people with smoking-related conditions according to the smoking rate in the smokers’ state at that time. It is well worth reading an account of this important legal case (https://en.wikipedia.org/wiki/Tobacco_Master_Settlement_Agreement). Some US states chose to securitise their future income assuming that the decline in smoking rates would continue at about the same rate. However, the decline in US smoking rates accelerated after vapes and some other safer nicotine products started coming on the market. The accelerated decline in smoking rates meant that income from the 1998 Master Settlement Agreement also decreased so that states which had heavily securitised their future income now had a growing shortfall in funding. Not surprisingly, the states which most heavily securitised their future earnings are also the same states most opposed to vaping!
For the last decade and a half, Australia’s tobacco control extremism has been matched by only one side of this conflict being presented to the public by governments, mainstream media and the health establishment. This is now slowly starting to break down. The One Nation party has advocated a 75% decrease in cigarette excise. There has been speculation that the Liberal party will recommend an 80% reduction. Coverage critical or skeptical of Australia’s extremist tobacco control now appears quite frequently in mainstream media. The NSW Legislative Council report on the ‘Illegal Tobacco Trade’ (Report #68) is the first Australian parliamentary report to accept the strong case for tobacco harm reduction. Australia’s per capita cigarette consumption peaked in 1960 while prevalence peaked in the mid 1970s. This was well before Australia started rapidly increasing cigarette excise, restricting smoking in public places and requiring graphic health warnings on cigarette packaging. It now seems inevitable that cigarette excise will be cut but it is hard to predict by how much and when this will occur. The quasi prohibition of vaping may continue for some time but its future survival now seems shaky. The reputations of the Australian supporters of conventional tobacco control is likely to start declining.
One of the lessons of this debacle is the importance of keeping an open mind and open debate among experts with different perspectives.
Surely the key issue is not how to recover the legal cigarette market, but how to accelerate the decline of smoking? If smokers are turning to illicit cigarettes because legal products are unaffordable, the most appropriate response is not cheaper legal cigarettes but affordable, regulated lower-risk alternatives such as vaping products and nicotine pouches. Australia could adopt a harm reduction framework where s risk-proportionate approach would keep cigarettes relatively expensive while making safer alternatives more accessible and attractive to adult smokers. The real measure of success would not be increased legal cigarette sales, but faster reductions in smoking, smoking-related disease, and illicit tobacco use. The goal should be to help current smokers leave cigarettes behind altogether, rather than bring them back to legal cigarettes. Or is Australia do far down the wrong track that it has no options to allow a change of direction?