Commercial

Since its introduction, the tobacco excise has been debated; however, a recent wave of political discussion have intensified calls to cut the excise.

The predominant reason for proposed cuts is the growing illicit tobacco industry.

In 2019, illicit tobacco was estimated to account for 15 to 20 per cent of the tobacco market.

Over 2024-2025, this number jumped to 50 to 60 per cent.

Cutting excise taxes is a hopeful step toward slowing market growth. However, some actors suggest this could be commercially motivated, leaving the illicit trade unscathed and worsening public health outcomes.

When is Tobacco Illicit?

Tobacco is considered illicit when it does not adhere to New South Wales and Commonwealth laws.

The Public Health (Tobacco) Act 2008 (NSW) requires anyone selling tobacco to hold a licence. Commonwealth laws separately require plain packaging, graphic health warnings, and payment of excise or customs duty. Tobacco that does not meet these requirements is illicit.

The Tobacco Legislation (Closure Orders) Amendment Act 2025 (NSW) furthers enforcement capabilities, giving inspectors greater powers and allowing the Secretary of the Ministry of Health to make short-term closure orders.

The amendments also established that possession of a commercial quantity of illicit tobacco is an offence, and that landlords may terminate leases while a closure order is in effect.

In more recent years, illicit tobacco products have been closely linked to organised crime. The illicit industry is profitable, with suggestions that it operates on low-risk, high-reward margins. The industry is likewise a ‘medium and increasing money laundering threat’, as the high volume of cash flow associated with tobacconists creates opportunities for the crime.

In their submission to an inquiry, the Australian Association of Convenience Stores linked over 230 firebombings to tobacco trade wars. Authoritative figures in NSW Police have stated, however, that recent violence cannot be determined as tobacco trade, and could be related to the illicit drug trade violence instead.

Regardless, legitimate tobacco retailers and businesses feel as if they have been impacted by illicit trade.

Responses to Illicit Tobacco Trade

In August 2026, a Legislative Council committee tabled its report into the illegal tobacco trade.

The report found that the federal excise had played a role in the expansion of the market, and had become a deterrent to smoking legal tobacco, rather than a deterrent to smoking altogether. The report also found that it was impacting legal retailers who were operating at minuscule profit margins.

It was recommended that the excise be reduced to its January 2019 rate.

Presently, the excise increases in March and September of each year to account for indexation. Based on historical excise rates, the tobacco excise per kilogram has increased from approximately $1,576 to $2,587.90 in the last 6 years.

Other recommendations included:

• Further regulation of local tobacconists,
• Reconsidering vape and smoking cessation tool prohibitions,
• Running public awareness campaigns,
• Strengthening and reviewing enforcement,
• Regularly assessing the Public Health (Tobacco) Act 2008 (NSW), and
• Directing the NSW Treasury to quantify the cost of the illicit tobacco trade.

The report has since heightened pressure on the Federal Government to consider what measures it will implement to prevent illicit trade.

Would an Excise Cut Work?

Many stakeholders, though not all, accept that the excise has contributed to the growth of the illicit market.

However, the prospective outcomes of lowering the excise are debated and unclear.

Relationship between Tobacco Excise and Smoking Rates

The past year use of any nicotine product in 2025 fell to 15.2 per cent, which is the lowest level recorded. In many eyes, this comes as high prices drive down consumer demand. However, Dr Edward Jegasothy, a Senior Lecturer at Sydney School of Public Health in The University of Sydney, gave evidence to the inquiry. He stated that when the tax began to increase in 2010, there should have been a decline in consumption to indicate price-sensitive consumption. Yet, in that measured period, there was not a decline in consumption any more rapidly than previously. Nevertheless, there is also substantial research to demonstrate that the two variables correlate.

Minimising Cost Disparity

Excise cuts would theoretically minimise cost disparity between illicit and legal products, pushing illicit products out of the market. Yet, the production and importation costs of illicit tobacco are likely low, meaning the retail cost of illicit products could be lowered further to remain favourable when compared with legal products.

Efficacy of Enforcement Approaches

Other than changing the excise, strengthening enforcement of illicit tobacco laws could be utilised to combat the trade. While black markets can be resistant to law enforcement, a more thorough enforcement approach is favoured by some over the excise cut.

Commercial Risks

Fears that major tobacco companies may benefit from the excise cut are prevalent.

In one article by the Conversation, the authors noted that one report supporting cuts was commissioned by Ritchies IGA and relied on British American Tobacco Australia data.

Other commercial risks include if the tax cut is not wholly passed on to consumers, allowing the illicit market to continue to function. Tobacco companies set retail prices, and no legal mechanism exists in the status quo to force them to pass the cuts on to consumers.

There is no conclusive answer as to whether a cut on the tobacco excise will substantially limit the illicit tobacco industry. As the political debate continues to grow, eyes will be on the Federal Government and how it addresses the varied opinions and concerns.