Is it time to rethink Australia’s tobacco tax?

Australian state governments are calling for tobacco tax cuts to address the growing illicit market. The Commonwealth has ruled it out. This isn’t a policy debate – it’s a standoff between the level of government that collects the revenue and the levels that deal with the consequences. But there’s a deeper problem: many government representatives and public health advocates won’t even acknowledge that high taxes are driving the black market in the first place.

Following the incentives

The political economy here is stark. The Commonwealth collects tobacco tax revenue, which was still around $7 billion last year (down from $16 billion 5 years ago), despite declining legal sales. Even as the illicit market continues to grow and tax revenue shrinks, it’s still a net positive for the Treasury compared to the alternative of cutting the tax. States bear the enforcement costs: escalating illicit markets, failing enforcement efforts, violence, organised crime, and community outrage. With legal cigarettes at $50 per pack versus illicit cigarettes at $15 (or less), only one level of government depends on maintaining that $50 price point.

States calling for tax cuts aren’t being “soft on tobacco” – they’re being realistic about enforcement limitations. They face the daily reality that you can’t simply police away a market when a 70% price advantage creates structural incentives for illicit trade. The Commonwealth can maintain its position only by denying this basic market logic and offloading enforcement costs (and thus opportunity costs) to states.

The “enforcement success” fallacy

Record seizures and shop closures are being celebrated as evidence that enforcement is working. But this misreads what these numbers mean. Seizures indicate market scale, not suppression success. If you keep plucking more weeds in your garden each week despite constant weeding, that doesn’t mean your weeding strategy is working, it means weeds are growing faster than you can remove them.

The fact that seizures keep breaking records, that new shops keep opening, and that states keep needing more enforcement powers, suggests the market is outpacing enforcement capacity. Closing individual shops addresses symptoms, not the structural conditions that make the illicit market viable. With a $15 versus $50 price differential, what prevents the next shop from opening or pushing people to more underground channels?

Enforcement has never successfully suppressed markets with this kind of demand structure and price advantage. The war on drugs demonstrated this conclusively. You cannot enforce away the basic economics of supply and demand when price differentials are this large.

The false binary trap

A common objection to tax reduction goes: “Even reduced taxes can’t compete with $7-$15 illicit packs, therefore tax cuts won’t work, therefore don’t try them.” This commits a classic false binary fallacy. The question isn’t will or won’t tax reduction eliminate the black market. The question is: at what point does the price differential become manageable for enforcement?

Currently, enforcement is trying to suppress a 70% price advantage ($50 vs $15). This is futile. But if tax reduction brought legal packs to, say, $30, enforcement would face a 50% price advantage. That’s still significant, but potentially within the range where enforcement plus other interventions might actually work. Narrower margins make enforcement viable; current margins make it impossible.

Dismissing tax reduction because it won’t completely solve the problem ignores degrees of difficulty. No single intervention will eliminate illicit tobacco. The question is whether tax reduction, combined with other measures, could make the problem manageable. Current pricing ensures the black market persists regardless of enforcement intensity.

The denial problem

Perhaps the most striking feature of current debate is how many actors refuse to acknowledge what drives the illicit market. Some treat the black market as an independent problem requiring only enforcement, not as a predictable response to prohibition-level pricing.

This isn’t evidence-based policy. It’s motivated reasoning protecting the tax policy. Basic economics tells us that when a legal product costs 3-5 times more than an illegal alternative, markets respond predictably. Wastewater analysis confirms consistent nicotine demand despite rising prices – people aren’t just quitting, they’re switching to alternative sources of nicotine.

Why the denial? Because acknowledging causation means admitting that current policy created the problem. It threatens the “high taxes equal public health success” narrative. Most importantly, it threatens the revenue stream the Commonwealth depends on. But you can’t design effective interventions while denying the mechanism that created the problem.

The moral purity trap

There’s something revealing about the intensity of resistance to even discussing tax reduction. Part of this is straightforward: tobacco causes enormous harm, and any policy that might increase smoking is unconscionable. But there’s something else operating here – a concern about moral murkiness.

Being associated with tax reduction means being associated with tobacco industry positions. In tobacco control circles, this is deeply stigmatising. The industry has lobbied against tax increases for decades, so anyone calling for review of the tax risks being seen as industry-aligned, regardless of their actual reasoning or evidence base. We can’t look past the distaste of doing something that might be in the interests of the tobacco industry, even if evidence suggests it might work.

This creates a perverse incentive structure: maintaining moral purity on tax policy becomes more important than examining whether the policy is actually working. You can hold the “right” position (high taxes) even if outcomes are poor, and this is morally safer than holding a “compromised” position (tax reduction) even if outcomes might improve. We can’t send a signal to industry or the public that we’re going soft on tobacco and sanction cheaper cigarettes which might cause smoking rates to increase again.

The result is a striking paradox: tobacco is effectively getting cheaper through black market competition, but this is somehow more acceptable than tobacco getting cheaper through policy adjustment. Indirect consequences of our actions – unregulated products, criminal networks controlling supply, violence in communities where illicit trade operates, marginalised populations dependent on organised crime for an addictive product – are preferable to the direct consequence of intentionally reducing the tax.

At least, the reasoning seems to go, these negative outcomes weren’t what we intended. We maintained our principles. We stayed tough on tobacco. The fact that the policy created worse conditions can be blamed on criminals, enforcement failures, or inadequate government commitment – anything but the policy logic itself.

This is moral positioning substituting for consequentialist analysis. It prioritises appearing tough on tobacco over actually reducing tobacco-related harm. And it means that even catastrophic policy failures won’t trigger reconsideration, because reconsidering means moral contamination.

The missing equity analysis

Remarkably absent from enforcement-focused arguments is any serious discussion of equity. Smoking remains highly prevalent, and is increasingly concentrated, among marginalised populations despite intensified policies including the tobacco tax.

Current policy creates no pathway to reduced harm for these groups. If enforcement “succeeds” in pushing people back to the legal market, success means extracting $50 packs from people who can least afford it. If enforcement fails, people sourcing unregulated products sold through criminal networks, with all the associated risks – no quality control, exposure to organised crime, potential for violence in communities where illicit trade operates – will be the completely undesirable outcome.

This is the multiple harm framework: populations already disadvantaged by smoking are then subjected to either punitive extraction through regressive taxation, or reliance on criminal markets for an addictive product. This isn’t “tough on smoking” – it’s a policy architecture that ensures the most disadvantaged bear the greatest costs.

Putting tax reduction “on the table”

To be clear: I’m not claiming tax reduction is a silver bullet. I’m not arguing it’s the only intervention needed. I’m arguing we must be able to put tax reduction on the table for discussion as part of a comprehensive strategy to regain regulatory control.

You cannot design effective policy with options ruled out ideologically. If we’re serious about addressing the illicit market, we need the full toolkit available. This might mean tax adjustment combined with better cessation support through alternative nicotine products, reformed regulatory frameworks, and smarter enforcement. But refusing to examine the tax question prevents rational policy design.

The test is simple: if black market reduction was the actual priority, all evidence-based options would be considered. If tax reduction remains unthinkable regardless of evidence, then other priorities – like revenue protection – are operating.

Toward honest policy

Australia faces a genuine challenge with illicit tobacco. But the current debate is stuck between two inadequate positions: “enforce harder” (ignoring structural market conditions) and “maintain high taxes” (ignoring equity and Commonwealth-State misalignment).

Neither acknowledges the fundamental bind: prohibition-level pricing creates enforcement-resistant markets. States understand this because they face enforcement reality. The Commonwealth can maintain its position only by denying basic market economics.

Tax reduction might not work perfectly. But neither will the status quo. It’s true that reducing the tax would be an extraordinarily expensive policy for the Commonwealth – in terms of loss of both tax revenue and political face. But we need to have honest accounting of what the true costs are, and whether the government is truly committed to regaining control of tobacco.