States need more cash to snuff out illegal smokes industry

Jim Chalmers is facing internal pressure to use the May 12 budget to give more cash to the states and territories so they can ramp up their fight against the illegal tobacco trade amid signs a near-decade long collapse in federal government cigarette excise is easing.

This masthead can reveal Chalmers is being pressed to supply up to $300 million in extra support while the legal tobacco trade is calling for a cut in excise levels, in a move that it says would reduce the nation’s inflation rate while undermining the organised crime-dominated illegal trade.

Tobacco excise, which as recently as 2020 was the federal government’s fourth-largest tax source, has collapsed over the past decade. By 2029, an estimated $65 billion in excise has been lost despite tougher border controls and large increases in the tax rates on cigarettes.

The mid-year update itself, released in mid-December, sliced $8 billion from what had been expected in his pre-election budget released in March 2025.

A continuation of that collapse, however, is not expected to be contained in the May 12 budget, due to early signs that new state-based crackdowns on illicit tobacco retailers is starting to bite.

In Queensland, where up to 200 illegal tobacco shopfronts have been closed, sales through legal retailers have stopped falling after new state government laws enabled Queensland Health to shutter outlets for 90 days without a court order.

A 10-day blitz netted almost 12 million cigarettes and 1.7 tonnes of loose tobacco.

Budget figures released last week showed that up to the end of February, excise duties – which include diesel, petrol and tobacco – were slightly ahead of what had been forecast in the mid-year update. Over recent years, excise has been well below forecasts due to the sharp collapse in tobacco collections.

But there are reports that criminals are now using WhatsApp groups, their own QR codes or flooding social media with messages advertising their product and how to obtain it.

Assistant Minister for Customs, Julian Hill, earlier this month told a national illicit tobacco symposium that crackdowns in Queensland and South Australia had delivered “encouraging results” including a return of legal trade.

But he cautioned a recovery in legal tobacco would be an ongoing battle.

“I acknowledge this is hard. Progress will not be smooth or linear. In some places things may get worse before they get better,” he said.

In the 2025-26 budget, Chalmers allocated almost $160 million to programs – many driven by the states and territories – aimed at the illicit tobacco trade. That funding ends in the middle of next year.

Ministers are pushing Chalmers to both increase and extend that funding by up to $300 million, so the states can continue their campaigns.

Australian Association of Convenience Stores chief executive officer Theo Foukkare said the huge increases in excise over recent years had driven people into the arms of the illicit tobacco trade.

On March 3, excise on cigarettes increased to $1.53 a stick from $1.40. The recent surge in inflation means, without change to excise rates, this will increase by at least another 10 cents when excise is adjusted in September.

Foukkare said Chalmers should give states more cash so they can target the illicit trade.

“Most Australians know that illegal cigarettes fund organised crime. They’re prepared to pay a small premium for legal cigarettes, but not four or five times that amount,” he said.

“What we really need in the budget is $300 million, to be shared among the states so they can be more aggressive in cracking down on illegal outlets.”

Chalmers is also facing pressure to cut the excise rate on cigarettes which has been a key factor in the explosion in the illicit trade.

In a letter to Chalmers, BAT Australia general manager Rory Cotter said the government had found itself in the “uncomfortable position” of having recreated the 1990s tobacco market but without excise revenue or protections for the community.

He said the government faced a choice in this budget, between permanently forgoing billions in excise while allowing the illicit trade to flourish, or finding a new way to protect the nation’s finances and ordinary Australians.

“This budget will tell Australians whether this explosion in illicit tobacco is an unintended consequence or an accepted outcome of current policy,” he said.

“If the end result is less excise revenue, rising smoking rates and organised crime controlling the tobacco market, then it is reasonable to ask whether this is a policy failure or policy by design.”

Industry analysis seen by this masthead suggests a 30 per cent cut in excise would reduce headline inflation by almost 0.4 percentage points. For the most recent February inflation figures, released last week, this would have brought inflation down to 3.3 per cent rather than 3.7 per cent.

Victorian Premier Jacinta Allen on Sunday said her government had already provided extra resources to state police which has led to an increase in arrests and the seizure of $5 million in illicit tobacco since February.

“We will also be strengthening the law to give the agency the powers to shut down illegal tobacco businesses. This is work that needs to continue,” she said.

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