Reset excise and strengthen enforcement to cut illicit tobacco

Overview

Commissioned by Ritchies IGA, this report assesses the scale, drivers, and impacts of Australia’s illicit tobacco market, benchmarks Australia internationally, and models how different policy approaches (excise reform plus strengthened enforcement) may affect legal consumption, illicit consumption, and government revenue.

Background

After decades of excise increases, legal tobacco prices in Australia are among the highest globally, supporting reduced smoking prevalence while historically generating substantial Commonwealth revenue. More recently, rising legal prices have coincided with rapid growth in illicit tobacco as consumers respond to affordability pressure and substitute away from regulated products. Australia is running out of time to address a rapidly expanding illicit market, which is impacting the health and welfare of Australians.

The report is anchored by five complementary evidence streams, including an OE-commissioned national volumetric conjoint survey of 1,500 regular smokers, plus real-world novel datasets from retailers and a major manufacturer, market sizing/forecasts (including Treasury/FTI/ATO inputs), and international benchmarking/case studies.

Challenge

• A widening legal–illicit price gap is accelerating substitution to illicit tobacco. Over the past decade, illicit cigarette prices rose far more slowly than comparable legal products, with the estimated price gap widening from $11 to $47.

• Illicit penetration is now at a scale that threatens policy, revenue, and legitimate commerce. The illicit share is estimated at 50–60% in 2024–25 (market size $4.1b–$6.9b) and is forecast to reach 89% by 2028–29 on current trends.

• The illicit tobacco market undermines tax revenues, distorts competition, increases enforcement costs, weakens public health protections, and ultimately threatens the objectives of the National Tobacco Strategy and the long-term health and welfare of Australians.

• Fiscal leakage is large and widening. Excise revenue has fallen from a peak of $16.3b (2019–20), with Treasury estimates at $5.5b (2025–26); the gap between earlier Commonwealth expectations (2018–19) and forecast receipts by 2028–29 is $67b, and Oxford Economics expects $1.5b in excise revenue by 2028–29 based on historical illicit growth.

• Evidence from a major retailer shows that closing illicit tobacco stores improved legal sales performance, narrowing year-on-year declines from –55% to –34% over six weeks. However, these gains could diminish as markets adjust, with illicit trade expected to keep growing while the legal–illicit price gap remains large.

• Survey evidence from 1,500 Australian tobacco consumers shows strong price sensitivity and widespread use of illicit products, with most respondents having purchased illicit tobacco and many actively managing costs by doing so. Consumers’ willingness to pay is far below current legal prices, especially for roll-your-own tobacco, indicating that rising excise and cost-of-living pressures have accelerated substitution into illicit markets, driven mainly by price but also by greater product choice.

Solution

Oxford Economics modelling using results from the conjoint survey and retailers showed that reducing excise rates would shift consumption away from illicit products. It found that cutting excise rates to 2019 levels and strengthening enforcement could substantially shift consumption back to legal channels by 2029, reducing illicit consumption by nearly half, shrinking illicit market share from 64% to 37%, and boosting excise revenue by $3.1 billion.

Oxford Economics Australia’s modelling indicates the most effective response is a coordinated policy reset that tackles both demand-side incentives (price gap) and supply-side controls (enforcement) rather than relying on enforcement alone.