Cutting the tobacco excise won’t stop the illegal trade. This is how other countries solved the problem

A tobacco shop in Victoria Street, Richmond, in inner Melbourne, was set alight after a ram raid in July, 2026. James Ross/AAP Published: September 7, 2026 4:10pm EDT The Coalition has proposed slashing the tobacco excise, the federal tax on tobacco products, by 80%. It claims cheaper legal cigarettes will draw people who smoke away from the illicit market and deprive organised crime of its profits. The proposal sounds appealing but is deeply flawed. Australia’s high tobacco tax undeniably makes untaxed sales profitable. Yet this incentive is not by itself a cause. Whether a tax creates a thriving illicit market depends on the strength of the systems designed to detect and prevent tax evasion, and hold offenders accountable. International experience tells a different story. Illicit markets thrive where there aren’t proper safeguards in place – meaning products cannot be tracked, agencies work in silos, and penalties fail to deter offenders. Several countries have reduced illicit trade while maintaining or increasing tobacco taxes. So, what can Australia learn from them? Cutting the excise won’t solve the problem The Australian Bureau of Statistics says the quantity of nicotine consumed in Australia increased by almost 40% from 2017 to 2025, underpinned by a large rise in illicit cigarettes and e-cigarettes. Prices for legal products tripled over that time. Australia’s illicit tobacco crisis is primarily a failure of tax administration. This is the system for collecting tobacco taxes, monitoring products, and enforcing the rules. Illicit markets flourish when taxes are not supported by the administrative safeguards such as tracking needed to secure supply chains and ensure compliance. The problem is therefore not simply a price gap waiting to be closed. Cutting the tax may make legal cigarettes more competitive, but it won’t dismantle the established offshore supply networks, hidden distribution channels and criminal groups that readily adapt. Cheaper cigarettes would undermine one of the world’s most effective public health policies. The World Bank and the World Health Organization identify high tobacco taxes as the most cost-effective measure for reducing smoking. These high taxes protect countries from associated health and economic costs of smoking-related diseases. Australia can maintain its effective tobacco taxes while also tackling illicit trade. Both advanced and developing countries can and do pursue both successfully. How have other countries tackled illicit tobacco trade? A major World Bank review published in 2019, examined how several countries tackled illicit trade. It found the system for administering taxes matters more than tax rates alone. The United Kingdom shows that illicit tobacco can be reduced even while tobacco taxes increase. Between 2005-06 and 2024-25, the estimated share of tobacco products sold illegally fell from 16.9% to 12%, even while tobacco taxes continued to rise. The UK rate equates to 47.2 pence per stick (about 88 cents), compared with the Australian excise of A$1.55 per stick. The UK credits this drop to its comprehensive illicit tobacco strategy, which includes a track-and-trace system that follows tobacco products through the supply chain, supported by tax markings and covert security features on cigarette packs that allow authorities to quickly verify whether products are legitimate. The UK also increased funding for inter-agency cooperation, the tax office, and border force. While Canada cut tobacco excise taxes in 1994 to reduce illicit tobacco trade, the role of the tax cuts versus greater enforcement is disputed. There were also disastrous public health consequences. By making legal tobacco cheaper, many young people started smoking, and an estimated 30,000–40,000 people may have died as a result. Importantly, tobacco companies were implicated in diverting tobacco products into illicit supply channels, while simultaneously promoting tax cuts as the solution to illicit trade. The reduction in illicit trade was also short-lived, as illicit trade ultimately increased again in the 2000s. High tobacco taxes do not inevitably lead to illicit trade. Governments need effective systems that can administer and enforce them. The illicit tobacco trade is complex and unique to every country. Tackling it requires a comprehensive mix of measures tailored to each country’s circumstances. These experiences show that strong systems share several features. They license and monitor every operator handling tobacco, use official markings to show whether tax has been paid, and track products through the supply chain. They also require operators to keep reliable records and check the legitimacy of their trading partners. Penalties must reflect the seriousness of each offence, while government agencies share information and coordinate enforcement domestically and with international partners. What went wrong in Australia? Australia imposed some of the world’s highest tobacco taxes without first ensuring these administrative controls were in place. Australia has no national system for tracking tobacco products through the supply chain. It also lacks physical or digital tax stamps or other official markings that let authorities know whether tax was paid. Regulation is fragmented across federal, state and territory governments. Licensing arrangements and record-keeping obligations are inconsistent, while enforcement agencies lack adequate resources. Stronger penalties and enforcement powers may help, but only when offenders face a meaningful risk of detection and prosecution. Enforcement can only succeed when authorities have the systems needed to monitor and control the supply chain. What should Australia do? Australia needs a detailed assessment of its illicit tobacco market, and a national action plan that is regularly updated as criminal methods and supply chains evolve. The assessment should map the products being sold, their origins, and the supply chains through which they reach Australia. A successful response must go beyond intercepting shipments at the border. Intelligence sharing, customs cooperation, and diplomatic engagement with source and transit countries are essential to disrupt the flow of illicit products before they reach Australian shores. A tax cut and temporary enforcement surge cannot remedy a structural weakness. Australia’s emerging illicit alcohol market suggests similar weaknesses may already extend beyond tobacco. Organised crime will keep exploiting these gaps unless Australia strengthens its laws, systems and controls. 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