We don’t know exactly how large the illicit tobacco trade has become; black markets are, by their nature, black. However, the data on licit consumption and excise revenues indicates the problem is massive.
The figures below are sobering. They show a precipitous collapse in lawful consumption and tax since 2022, when Australia’s border reopened following the pandemic. When compared with historical trends, the data suggests that as much as half of Australia’s tobacco consumption has shifted to the black market, at a $10bn cost every year to the federal budget.
The Australian Taxation Office previously has published “tax gap” estimates of the size of the illicit tobacco market. However, it acknowledged last year its numbers were “no longer a sufficiently credible or meaningful estimate” and removed tobacco excise from its routine tax-gap performance calculations.
This explosion in illicit tobacco has deep consequences for all Australians. Its impact on law and order, health and the federal budget is significant.
No matter which way you cut it, we have witnessed a dismal policy failure at federal and state levels and across the political spectrum.
Law and order is the most obvious impact, with a black market valued in the tens of billions suddenly appearing overnight. This is a boon for organised crime and a disaster for community safety, with turf warfare and firebombings to control the trade now reported almost daily.
It’s also an affront to the law-abiding businesses that sell licit tobacco that have lost sales to black-market competitors and sometimes are pressured to join the illicit trade. Neither can we ignore the public health impacts. Australia’s tobacco-control efforts – founded on high excise rates and plain-packaging rules – act as a defacto prohibition policy and apply only to licit sales.
As consumption shifts to the black market, it also moves outside these policies, comprising our public health settings.
If we start from the assumption that at least half of tobacco consumption is now illicit – the figure provided by the Illicit Tobacco and E-Cigarette Commissioner – then current data implies that up to 1.5 million people are participating in the market. Black-market tobacco clearly has gone from niche to mainstream.
The last Australian Institute of Health and Welfare survey in 2022-23 found an 8 per cent daily smoking rate.
With illicit cigarettes now retailing for a third of the cost of the licit product, there is a risk its next survey will be the first since 1993 not to report a decline in smoking rates.
Third – and perhaps least appreciated – are the impacts on our public finances. The cost of illicit tobacco to the federal budget is hard to model precisely but analysis of past trends suggests it is credibly approaching $10bn this financial year. This would be roughly equivalent to how much the federal government expects to spend on public order ($9.1bn), higher education ($12.1bn) or roads ($10.1bn) this financial year, and twice that for student assistance ($5.8bn) or housing ($4.4bn).
Recent modelling by the Productivity Commission indicates we could lower the company tax rate to 25 per cent, which would materially raise GDP, investment and productivity levels for a net fiscal cost of $6.1bn.
Some have argued this well-overdue tax reform is more than the budget can bear, yet we let more money walk out the fiscal door via illicit tobacco.
The dilemmas of federalism lie at the heart of the problem. The federal government sets tobacco policies and is responsible for controlling inflows at the border and raising revenue, while the states are responsible for much of the behind-the-border compliance.
Moreover, each state has its own legislation, compliance agencies and penalty regimes with many inconsistencies between. The result is a patchwork of non-aligned frameworks that has created space for the illicit trade to flourish.
The obvious solution is to adopt a single national market approach to the illicit-tobacco challenge. This reform modality was endorsed last year at the Treasurer’s Economic Reform Roundtable, where policy frameworks for national issues are harmonised through co-ordination between state and federal agencies.
Initial applications of the single national market principle have included issues such as occupational licensing, product regulations, environmental permitting and vehicle taxation.
Illicit tobacco should be the next addition to that list.
We need three clear actions. First, we need to standardise our behind-the-border efforts. State-level laws and compliance programs need to be harmonised to close weak spots, so that busts in one jurisdiction don’t simply shift the trade to another.
Second, penalties need to be made proportionate to the scale of the black market. Illicit tobacco is now a multibillion-dollar trade and current levels of fines are clearly insufficient to deter organised criminal networks.
Third, we need to get the resourcing right. Tobacco excise flows into the federal budget which, therefore, has the most resources to dedicate to and the most revenue to lose from the illicit trade.
The federal government needs to lead this fight starting in the May budget via a resourcing uplift that targets the entire illicit-tobacco supply chain. Illicit tobacco is a national crisis harming Australia. There are billions of dollars at stake. The time has come for a nationally joined-up solution.
Extracted in full from: https://www.theaustralian.com.au/commentary/how-policy-failure-fuels-a-10bn-black-market-for-illicit-tobacco-in-australia/news-story/739b41436a64549b80e2d8b0a8d81c9a
The explosion in the illicit tobacco trade in Australia since the pandemic is a national catastrophe. The consequences for law and order and public health and finances are profound, demanding a national solution that transcends the constraints of our  federalism.