Vaping and black market tobacco burn $31 billion hole in budget revenue

The documents, from 2023, reveal Treasury officials examined key assumptions underpinning the economic models used to determine price increases and what this did to excise collections. At the time, tobacco excise collections were falling short of the department’s forecasts.

Loading

They confirm Treasury’s assumptions failed to consider other factors that may affect “official” smoking rates and the revenue expected to flow to the federal government.

The most important missing element is so-called “substitution effects – whether people may switch to vaping and/or the impacts of the black economy”.

Also missing are the possible impact of the changes on consumer behaviour such as hoarding cigarettes before a policy change, whether people quit altogether or scale back smoking, or if fewer people start smoking altogether.

Australia’s tobacco smoking rates are at record lows, down to 8.3 per cent of the adult population in 2022-23, but vaping has risen sharply among young adults, while a growing number of smokers have said they purchase tobacco products without plain packaging. The average price of a pack of cigarettes is more than $50.

Sydney University senior lecturer Ed Jegasothy said Treasury had long acknowledged that higher prices for tobacco could drive an increase in the illegal cigarette trade, but never sought to properly understand its impact on tax revenue.

He said the revenue forecasts produced in 2023 and used to support three increases of 5 per cent in tobacco excise were illusory.

“The massive shortfall we have seen in tax revenue over recent years demonstrates just how faulty these models and their underlying assumptions are,” he said.

“To my knowledge, the government has never evaluated the effectiveness of the tobacco tax in reducing rates of smoking in the population – the primary justification for these policies.”

Loading

Deakin University criminology senior lecturer James Martin said the increase in excise plus the government’s ban on consumer vapes had created a multibillion-dollar opportunity for organised crime.

Last week, the Australian Tax Office, Border Force and Victoria Police destroyed more than 16 tonnes of illegal tobacco, with an estimated excise value of $35 million, which had been found on a property in central-north Victoria.

The tax office and Border Force’s joint illicit tobacco team has, between mid-2018 and mid-2024, found and destroyed 253 hectares of tobacco crops and 21.8 million illegal cigarettes.

“By overly restricting the sale of legal, regulated nicotine, consumers have had little choice but to turn to the black market,” Martin said.

“This has led to disastrous, sometimes fatal consequences, including more than 200 arson attacks around the country as a result of rival organised crime groups fighting for control of the market.”

A spokesperson for Treasurer Jim Chalmers said tobacco tax receipts were routinely updated.

“These updates consider the latest available information around excise collections data and the outlook for tobacco volumes – including changes in demand due to number of people smoking, substitution or changes in policy,” they said.

The government is putting $157 million into law enforcement agencies to target the tobacco black market.