Australia lost $1.1 billion because of illegal cigarettes last year

The opposite of what a cigarette ban should look like.
The opposite of what a cigarette ban should look like.
Image: Reuters/Daniel Munoz
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Smokers and the tobacco lobby should get a kick out of this: In Australia, where cigarettes are among the priciest in the world—as much as US$13.90 a pack—the illegal trade of cigarettes is costing the government $1.1 billion in lost tax revenue. That’s according to a new report (pdf. p. 27) by Oxford Economics and the International Tax and Investment Center.

The country’s attempts to discourage smokers with higher taxes have fueled an illegal cigarette industry, whereby cheaper undeclared cigarettes are smuggled in or made locally to avoid taxes. After the government placed a 25% excise increase on cigarettes in April 2010, seizures of “illicit” cigarettes rose to 122 million cigarettes in 2012, up from 82 million in 2011, the study notes. The researchers estimate that 11.3% of all cigarettes, or 2.7 billion cigarettes, consumed in Australia last year were illegal, smuggled from countries like China or South Korea, or made from homegrown “chop chop” tobacco.

But taxes may not be entirely to blame for the illicit trade. Even though cigarettes in Australia are second only to Norway in average price-per-pack, taxes don’t actually make up as high of a portion of that price as in many other countries. (Taxes make up 55% of the price of Australian cigarettes compared to 87% in Cuba, or 74% in Egypt as well as in the United Kingdom.) Moreover, when compared to incomes, the price of cigarettes is pretty low. The relative income price of cigarettes in Australia (defined as the percentage of annual per-capita income needed to buy 100 packs of cigarettes) is 1.73%, which isn’t much higher than 1.32% in the US, according to the Tobacco Atlas. (In the US, excise taxes account for about 40% of cigarette prices.)

Illegal cigarette peddling has been a relatively low-risk endeavor in Australia, compared, for instance, to smuggling illegal drugs. The main penalties dealers faced until last year, when the law was changed, were fines of up to five times the amount of the dodged customs duty. Now cigarette smuggling carries a maximum penalty of 10 years in jail. But if Australia goes forward with anti-smoking advocates’ proposals to completely ban the practice, the business will become a lot more lucrative.