The Tobacco Tax Is Australia’s Worst Policy Failure

If you are looking for a massive policy disaster in Australia at the moment, it would be very hard to go past what is happening around the sale of cigarettes and vapes.

The official numbers tell a terrible story, while the consistent crime reports of fire bombings by rival illegal tobacco gangs add a human side to the tragedy.

The Federal Budget for the current year anticipates tax revenue from tobacco of just $7.4 billion, down from $12.6b in the previous year as tobacco excise revenue continues to plummet.

Illegal Industry Cannabilises the Market

What is happening here is quite clear—legal cigarette sales are being heavily cannibalised by untaxed illegal cigarettes that are flooding into Australia courtesy of rival gangs and being distributed through tobacco shops.

The whole idea of tobacco excise was to keep it rising so that tobacco usage kept falling; however the tax has now grown to such an extent that importing illegal and untaxed cigarettes and selling them openly through retail networks has become a massive and incredibly profitable business.

At the moment, there seems to be little chance of making a dent in this policy disaster.

The Australian Tax Office (ATO) seems absolutely incapable of ensuring that tobacco sold in Australia has been taxed and state police forces also seem incapable of tackling the illegal tobacco gangs in any meaningful way, other than mopping up burning shops after the damage is done and hoping there won’t be any casualties.

As tobacco excise rates continues to climb, the attraction for the illegal tobacco trade just keeps growing and the problem seems to grow beyond any of the current feeble enforcement efforts.

Tax Gap Just Keeps Growing

The ATO now estimates that about 18% of all tobacco sold is illicit and there is now a net tax gap of 14.3%.

This has caused tobacco excise revenue to drop from being the fourth-largest source of government income to the seventh-largest in just a few short years.

In the current year alone, the missed tax is estimated at a massive $6.9b.

This appalling policy bin fire has led to many claims that the answer is to cut the tobacco excise to a more reasonable level, thereby discouraging the illegal trade.

However, this argument doesn’t hold water at all because the tax would need to be slashed dramatically to come even close to competing with the illegal market, which offers cigarettes for as little as $12 per pack compared to the “official” price of around $50.

Tough Enforcement Action the Only Answer

The only way this problem can be addressed is if there is a serious and concerted effort by the ATO, and the state and federal police forces, to seriously crack down on the sale of illegal cigarettes and vapes and to throttle the import of these products by ramping up import inspections.

In the absence of this sort of action, the business of illegal tobacco will continue to flourish and promote fights between rival crime factions as the amount collected in tobacco excise continues to fall.

The unwanted byproduct of all of this is that tobacco consumption which has been falling for many years, could well have started rising again and probably has been for several years.

Who would know, with no official figures to cover the actual tobacco consumption on the ground?

Whichever way you look at it, from health to tax collections to crime, this issue is a massive policy failing where the initial rationale for the rising tax no longer applies and where a massive black market has been allowed to flourish absolutely unimpeded.

What’s next, illegal shipments of petrol being sold at a cut price to avoid the fuel excise?