Copycat cigarette policy would reshape the illegal trade
Cutting tobacco excise sounds like surrender — but the economics of Australia's black market make the case more complicated than that.
The Coalition's proposal to cut tobacco excise by 80 per cent is not primarily a health policy. It is a market intervention designed to price organised crime out of a supply chain it currently dominates. Whether it works depends less on what happens to demand and more on what happens to the economics of the illegal trade itself.
Half of all cigarettes already move through criminal supply chains
The starting point matters here. The tobacco commissioner estimates that roughly half of all cigarettes sold in Australia now move through the black market, with illegal packs available for around $15 or less. That figure reframes the usual debate about excise and smoking rates. The relevant price signal for most current smokers is not the legal retail price, which sits above $40 a pack, but the street price of illicit tobacco. If you want to smoke cheaply in Australia in 2026, you already can. The policy question is not whether cutting the excise will tempt new smokers with affordable cigarettes — affordable cigarettes already exist. The question is what reshaping the supply side does to the market as a whole.
Here is how the economics work when you cut the legal price to near parity with the illegal one. First, a portion of existing black market demand shifts to legal product. Volume through legitimate retail channels rises; volume through criminal supply chains falls. That reduction in volume hits the illegal trade's unit economics hard. Fixed costs of smuggling, storage, and distribution get spread across fewer units. The business becomes less profitable per pack sold.
Then add the enforcement side of the Coalition's proposal. Shadow Home Affairs Minister Jonno Duniam has framed the excise cut explicitly as one leg of a two-part strategy: reduce the profit margin, then increase the legal risk. When margins compress and enforcement tightens, criminal suppliers have two options: exit the market or raise their prices to compensate for the elevated risk. Either outcome is a win for the policy's stated objective. An illegal market that has to charge $25 a pack to stay viable is a much smaller illegal market.
The Canadian precedent is more cautionary than the Coalition admits
The Coalition points to Canada as its template. In 1994, facing an explosion of organised tobacco crime driven by high excise rates, Canadian federal and provincial governments cut tobacco taxes sharply. The black market contracted. Smoking rates did eventually fall to 11 per cent, roughly comparable to Australia's current estimated rate. But the Canadian example is a more ambiguous endorsement than the Coalition presents it as. The immediate effect of the 1994 cuts was a spike in smoking, particularly among young people. And when Canada gradually restored pre-cut tax rates over subsequent years, the illegal market did not stay crushed — it came back.
The lesson is not that tax cuts defeat black markets permanently. It is that tax cuts can create a window for enforcement to establish itself, if the enforcement is actually there and the tax eventually settles at a level the legal market can sustain competitively.
That last condition is the one that receives the least scrutiny in Australia's current debate. The Coalition has not published modelling on smoking rates. It has published Parliamentary Budget Office modelling on the excise level needed to change consumer behaviour, which is a different question. What the Canadian case suggests is that the sequencing and the endgame matter enormously. A temporary excise cut that is eventually wound back is not a solution — it is a postponement with a youth smoking spike in the middle.
The revenue arithmetic only works if the volume assumptions hold
There is also the revenue question. Australia's tobacco excise, even in its increasingly leaky state, still generates significant federal revenue. A cut of 80 per cent relinquishes most of that. The Coalition's bet is that a smaller tax on a much larger legal volume can eventually replace it. That arithmetic is not implausible if the black market really does collapse, but it depends on a speed and completeness of market shift that no comparable country has actually demonstrated. As we noted when One Nation first floated a similar proposal, the budget arithmetic only works if the volume assumptions are right, and the volume assumptions are the most uncertain part of the model.
It is also worth being precise about who bears the cost of getting this wrong. Tobacco excise, like most consumption taxes, falls disproportionately on lower-income Australians, who smoke at higher rates. A policy that cuts the legal price but fails to suppress the illegal market leaves those smokers paying more for a legal product they were not buying anyway — with criminal supply chains still intact and a revenue hole in the federal budget.
The Coalition's instinct — that the illegal market must be addressed, and that price competition is part of the answer — is not wrong. The supply of cigarettes in Australia has become genuinely complicated, and the pretence that ever-higher excise was doing public health work while organised crime was doing the actual distributing was never a sustainable position. But the mechanism the Coalition is proposing is sensitive to variables it has not fully modelled, premised on an overseas precedent that is more cautionary than confirmatory, and structurally dependent on an enforcement capability that does not yet exist at the required scale. The policy might work. The honest case for it requires saying so, rather than insisting the question has already been answered.
Sources
ABC News — Slashing tax on cigarettes will not lead to more smokers, Angus Taylor says
The Bearing — Big tobacco could save the day for the government budget
Frequently Asked Questions
Why does Australia have such a large illegal cigarette market?
Australia's tobacco excise has pushed legal pack prices above $40, creating a large price gap that organised crime has filled with smuggled product available for $15 or less. The tobacco commissioner estimates roughly half of all cigarettes sold in Australia now move through black market channels.
Did Canada's tobacco tax cut actually work?
Partially. When Canada cut tobacco taxes sharply in 1994, the black market contracted and smoking rates eventually fell to around 11 per cent. But the immediate effect was a spike in youth smoking, and when Canada later restored higher tax rates, the illegal market returned — suggesting the cut created a window rather than a permanent fix.
How would cutting tobacco excise affect government revenue?
An 80 per cent excise cut would forfeit most of the revenue Australia currently collects from tobacco. The Coalition's case is that a smaller tax on a much larger legal volume could eventually replace it, but that arithmetic depends on a speed and completeness of black market collapse that no comparable country has demonstrated.
Would cheaper legal cigarettes lead to more smokers in Australia?
The Coalition argues it would not, because cheap cigarettes already exist on the black market — the excise cut would shift existing smokers from illegal to legal supply rather than recruit new ones. The risk the policy cannot rule out is a near-term uptick in uptake, particularly among young people, as the Canadian experience showed.
Who is most at risk if the policy fails to suppress the black market?
Lower-income Australians, who smoke at higher rates and are more sensitive to price. If the illegal market persists despite the excise cut, those smokers face a legal product they may still find unaffordable, intact criminal supply chains, and a federal budget with a significant revenue hole.