Treasury Examines Tobacco Price Elasticity Amid Growing Black Market Crisis
The Australian Treasury has initiated comprehensive modeling to assess the relationship between cigarette prices and consumer demand, as mounting pressure calls for a freeze on the contentious tobacco excise. This examination comes amid a flourishing black market that has inflicted a staggering $17.8 billion hole in the federal budget since 2020-21, with illicit tobacco now accounting for approximately half of all tobacco consumed nationwide.
Government Officials Signal Potential Policy Shift
While Treasurer Jim Chalmers and Health Minister Mark Butler have consistently rejected suggestions that lowering cigarette costs could address the illegal trade, Finance Minister Katy Gallagher recently indicated openness to policy review during Senate estimates. "The government keeps all of these matters under review," Gallagher stated, emphasizing that "there's not a single solution" and confirming Treasury consultations with multiple departments.
Lachlan Vass, research manager at the e61 Institute, highlighted the significance of Treasury's price elasticity analysis, noting this represents policy costing rather than routine budget projections. "When they do a policy costing they explicitly take into account the elasticity because they have to make a judgment about what this relative increase in prices means for demand," Vass explained.
Stark Price Disparity Fuels Illegal Trade
The economic incentive for black market participation has become increasingly compelling as legal cigarette prices soar. According to Illicit Tobacco and E-cigarette commissioner estimates:
- Black market cigarettes cost approximately $10-$15 per packet
- Legal 20-packs retail for about $40 or more
- Tobacco excise has increased by 60% since 2020
- The tax constitutes three-quarters of legal cigarette costs
This dramatic price differential has created what economists describe as a "tipping point" around the turn of the decade, with the excise policy now facing criticism from multiple fronts.
Revenue Decline and Expert Recommendations
Excise revenue has experienced a precipitous decline from its $16.3 billion peak in 2019-20 to projected figures of $5.5 billion this financial year and $4.8 billion next year. Several prominent economists have joined public health experts in advocating for excise reform.
Chris Richardson, a leading economist, asserted that "we got the taxing of tobacco spectacularly wrong," adding that current policies have "subsidised the fastest increase in the revenue of organised crime that Australia has ever seen."
Becky Freeman, University of Sydney public health professor and tobacco expert, supports freezing the excise at current levels. "I only support tax increases if they are effective at reducing smoking," Freeman stated. "And now we know the size of the illicit market and how incredibly cheap those products are, I agree that a freeze at this time makes sense."
Government Response and Future Considerations
The federal government has committed an additional $350 million over the past two years to bolster state authorities' efforts against illicit tobacco. Treasury deputy secretary Diane Brown confirmed ongoing elasticity modeling work, while Vass argued for at least temporarily freezing the excise to allow cigarettes to become less expensive in real terms over time as part of a comprehensive health and enforcement strategy.
As Treasury continues its analysis, the debate intensifies between maintaining high excise as a public health measure versus addressing the unintended consequences of fueling a massive black market that undermines both government revenue and regulatory control.
