Big Tobacco and its errand boys in the convenience store industry are clearly limbering up to try and make illicit cigarettes and vapes a hot button issue in the forthcoming election.

The buttons they are hoping to push are a wind back in tobacco excise, and scrapping of the pharmacy-only regulatory model of vape access. This would allow virtually any registered retailer to sell vapes, something many convenience stores have been doing illegally for years and continue to do so. So a great idea — let’s reward them now for years of ignoring the law, as they clearly have built community trust as responsible retailers!

The main games here, under the cover of raising community alarm about criminality in tobacco and vape retailing, are to remove the exclusive sale of vapes from pharmacies and the forlorn hope that lowered tobacco tax will see mass criminal exit from selling cheap cigarettes. As we will see, this fantasy has all the integrity of a chocolate teapot.

The Australian Association of Convenience Stores which has a long history of tobacco industry support and its chief executive Theo Foukkare who started his career with British American Tobacco, recently publicised its latest commissioned report on illegal tobacco retailing. In a report in The Australian, Foukkare wanted the government to freeze excise on tobacco products for four years. A few days before, he went further “it is time for the Government to seriously consider lowering the excise on tobacco”.

Foukkare, nor any other advocate for lowering excise, ever go beyond this slogan. But as we shall see later in the blog, excise reductions would need to be simply galactic to make legal cigarettes price competitive with illegal duty-not-paid cigarettes.

Two National Party MPs have also called for tobacco tax to be reduced in Australia to make legal, duty-paid cigarettes more competitive. The National Party receives financial support from British American Tobacco and Philip Morris International, which have lost every policy debate on tobacco control since the 1970s when the first pack health warnings appeared.

Both the ABC’s Four Corners and Nine’s 60 Minutes have very recently covered the issue, leading and promoting their programs with memorable graphic footage of standover firebombings of stores, as rival criminal gangs viciously shirtfront each other for greater control of the lucrative illegal market.

Australia currently has the highest retail and among the least affordable prices in the world (see two graphs below), and no one disputes that those who buy cheap illegal cigarettes here, as in every country which has illegal tobacco trade, are motivated alone by lower prices. So would lowering the price by lowering excise in Australia, see those running the many shops selling illegal cigarettes just walk away?

An obvious question

A most obvious question to ask here is “do nations with more affordable legal cigarettes, also have significant tobacco black markets?” If they do, it would be clear that criminals will continue to see large opportunities to sell illegal stock regardless of how high or low the prices of legal cigarettes are. The cut-the-tax house of cards would tumble down in the first breeze of evidence.

The commercially-motivated magic bullet of lowering tobacco tax to lower illicit sales reflects a parochial ignorance of global illicit trade in tobacco, and the lack of a consistent relationship between the operation of that trade and the retail price of legal tobacco. Low income nations (for example) Vietnam, Philippines and Senegal where tobacco is dirt cheap are often also awash with black market cigarettes.

This month, Thai officials arrested 690 vendors in just one week allegedly breaking Thailand’s laws on selling vapes.

But what about nations that are more socially and economically comparable to Australia? Before I look at three such countries (USA, UK, Canada), a brief overview of the published literature on global illegal tobacco trade, including in Australia.

Illicit tobacco trade: a very long history

Some commentators on illicit tobacco trade appear to have come down in the last shower. This is a global phenomenon which has a long history. Over 30 years ago in 1994, tracking of European tobacco export and import data  found a 30.8% difference between the number of cigarettes officially exported and imported. The only plausible explanation for these missing cigarettes was smuggling, particularly of expensive premium brands moving from northern Europe into lower income eastern and southern European markets.

The tobacco industry has long been active in supplying cigarettes to the illegal duty-not-paid trade while trying to alarm governments about excise tax losses and lobbying for reduced excise. A 2019 systematic review of 35 assessments of the extent of illegal tobacco trade found that 31 of these reported that tobacco industry estimates of the extent of illegal trade were higher than independent estimates by researchers with no tobacco industry ties. Lack of transparency from data collection right through to presentation of findings was a key issue with insufficient information to allow replication of the findings frequently cited.

The authors concluded that tobacco industry data on illegal tobacco trade are not reliable and are intended to talk up the problem in the hope that governments would hobble policies like tax and plain packaging that have serious potential to reduce smoking.

There has been a long history of illegal retailing of duty-not-paid cheap cigarettes and loose “chop chop” tobacco in Australia, with reports of use back to 2001. Tobacco industry estimates of the proportion of tobacco use in Australia sourced illegally since 2012, ranged from 11.8-23.5%, substantially higher than independent estimates from the Australian Taxation Office’s revenue gap analysis which estimates 5.4 to 14.3% between 2015-16 and 2022-23. The ATO estimates that approximately 18% of tobacco for sale is illicit.

Illicit trade in UK

The graphs above show cigarettes today are cheaper and more affordable in Britain than in Australia. A 2024 report by the UK’s HM Revenue and Customs concluded that the forgone value of the  “illicit market in tobacco duty and related Value Added Tax was £2.8 billion in 2021 to 2022.The proceeds of this crime fund the smuggling of weapons, drugs, and even human beings across the globe. We must tackle the cancer of organised criminal groups as unwaveringly as we tackle the harms of smoking itself.”

Years of effort by UK Border Force “have reduced the estimated duty gap for cigarettes by a third (from 16.9% in 2005 to 11% in 2021 to 2022) and for hand-rolling tobacco by a half (from 65.2% to 33.5% over the same period).”

From April 2015 to March 2023, this resulted in:

• £10 billion: tobacco duty receipts in 2022 to 2023
• 10.6 billion: non UK-duty paid cigarettes seized by HMRC and Border Force
• 1,600 tonnes: non UK-duty paid hand-rolling tobacco seized by HMRC and Border Force
• 1,571: people convicted of tobacco crime offences
• 8,000: assessments to recover unpaid excise duty
• 9,304: excise wrongdoing penalties issued for tobacco offences
• £298 million: value of penalties and assessments raised

Illicit tobacco trade in USA and Canada

The graphs above show both cigarette prices and affordability in the US are much lower than in Australia. In 2024, the average cost of a pack of 20 cigarettes was $US8 ($AUD12.71) compared with Australia at around $40. Nonetheless, illicit traffic in the US is decidedly non-trivial.

The 2015 report from the US National Academies Understanding the US  illicit tobacco market estimated the total market represented by illicit sales in the United States was between 8.5 percent and 21 percent of the total. It recommended that“research and data are needed about the individuals and criminal networks who traffic in illicit tobacco.”

Comparing illicit trade in Australia with that is the US is difficult, because Australia does not have state taxes whereas the US has a variety of low and high taxing states. Illicit tobacco trade in the US is dominated by illegal movement of cigarettes from lower taxing states to those with higher taxes, including from Native American tax free  zones.  The US federal tobacco tax is $US1.01, with the lowest state tobacco tax an additional $US0.17  and the highest in New York state at  $US5.35. These sorts of differences also occur in Canada.

So like Australia where nation-wide high tax and prices have attracted significant illicit trade, high tobacco taxing US and Canadian states also attract incoming illicit trade from lower taxing states. But the critical point to make here, is that even though cigarettes are considerably more affordable than in Australia, illicit traders still have major involvement in tobacco commerce.

These US and Canadian examples illustrate that for whatever reason, where you have high retail prices, criminals will seek to illegally undercut these, and it doesn’t  matter how low the prices are, they will still try to do it.  New York’s average pack price is $US14.55 ($A23.12) far less than Australia’s ~$40, and far more affordable than Australia’s. And in very low income  countries, dirt cheap legal cigarettes are still undercut by illicits.

Market research firm Circana estimates that in 2024 sales of unauthorised, flavoured disposable vapes in the US amounted to  35% of the $6.8 billion worth of e-cigarettes sold in tracked convenience stores and supermarkets. And this estimate does not include massive on-line sales or those from vape shops. The FDA puts the proportion of vapes being sold in the US which do not have a required FDA marketing order at 86.4%. Vapes are sold openly in most of the US, as they are in Canada and the UK.

Canada

Taxes and prices are also considerably lower and cigarettes considerably more affordable in Canada than in Australia. The Canadian convenience store industry recently stated low-cost tobacco products have become a “major selling feature” for well-known and established organized criminal groups such as the Hell’s Angels. “It is absolutely organized crime at the highest level. It’s a billion-dollar industry for (organized criminal groups). It involves all the levels of violence, and extortion and gangsterism that comes along with it.” ) In Canada illegal sales outnumber legal sales in one province by 52% and 36-45% in three others.

The dramatic data above instantly repudiate claims that open access sales of vapes and cheaper, more affordable legal duty-paid cigarettes prevent or even reduce illegal supply and deter criminal involvement. 

Tobacco control—including tax policy – has driven smoking to its lowest ever level

Both 60 Minutes and Four Corners featured ex-Australian Federal Police and former Border Force Tobacco Task Force head Rohan Pike. Pike was described by 60 Minutes as someone “who now advises the retail sector” and by Four Corners as “a lobbyist for retailers”. But neither program asked Pike whether he was advising the convenience store industry out of the goodness of his heart, or whether he had any financial relationship with them.

Pike told 60 Minutes “excise rates are the primary driver of this problem from the start, we should be looking to reduce the excise rates” and hyperbolically described the illicit trade situation as “This policy is perhaps one of the biggest failures in Australian history, really.” A memorable soundbite, but “really”? Really? Bigger even than the housing crisis? The AUKUS submarine debacle? Indigenous health and incarceration rates? The plight of the Great Barrier Reef?

In the 60 Minutes program, veteran organised crime observer John Sylvester stated  “putting heavy tax on smoking was done for two quite legitimate reasons: to raise revenue and secondly to discourage people from smoking. So governments and authorities would look and go, ‘Wow, our excise is down, that means people aren’t smoking.’”

Well, no. Only the most inexperienced analysts of tobacco and nicotine use in Australia would ever exclaim that a fall in total excise receipts could only be due to a fall in smoking. People moving to illicit duty-not-paid cigarettes would clearly reduce total excise but this would not allow any sensible conclusion about whether smoking was falling or rising.  The proportion of people who buy their cigarettes from illegal supplies is an entirely different question from the proportion of people who smoke. It’s not about how or where you get your cigarettes, it’s about whether you get them at all.

Mark McKenzie, CEO  of ACAPMA, Australia’s fuel industry lobby group, has also swallowed the tobacco consumption is rising argument writing that the explosion of illicit retailers “is clear evidence of a rising tide of tobacco consumption – one that government statistics fail to capture”. No Mark, it’s clear evidence of criminal interests fighting intensely over the shrinking market of smokers.

In a recent blog I showed that data on smoking prevalence from the National Drug Strategy Household Survey collected since 1998, shows smoking is now lower  than it’s ever been, with the most recent fall being the largest seen since surveys began. Smoking by kids is heading toward extinction.

So how low would tobacco excise need to go to make the black market disappear in Australia?

It’s easy to call for “lower” tobacco tax, but how much lower would it need to be to see budget-conscious smokers switch back to buying taxed cigarettes? A common price for the most popular illegal brand of cigarettes in Australia is $15. The current excise rate on cigarettes in Australia is $1.40313 per stick. So the tax alone on a pack of 20 cigarettes is now $28.06.

A common retail price for popular brands of legal duty paid cigarettes is around $40, with the extra component costs ( after ~$12 tax is deducted) being those going to cigarette manufacturers and retailers. Given that tobacco manufacturing and retailing interests are not talking at all about radically dropping their margins to compete with $15 illegal pack prices, are the “cut the excise” voices then suggesting that the government should therefore  “take one for the convenience stores” and give up perhaps all of its tobacco excise ($40-$28 = $12), a price that would certainly blow illegal retail trade out of the water?

We don’t know how low illegal cigarette retail pricing could fall to still remain very profitable to those running it. But by now, simplistic calls to “cut excess” lead us very quickly into this truly absurd territory, when the obvious solution is instead for governments to crack down hard on the illegal retailers. Small cuts would make no significant difference to the large gap between legal and illegal cigarettes. Only massive or even entire scrapping of tobacco excise would bridge that gap.

Recent advocacy by convenience stores to list the river of extra money that the government would receive if excise tax was “lowered” and smokers flooded back to buying legal cigarettes would therefore be conditional on the government removing most or all of the very tobacco tax which the convenience stores say would start pouring again into the coffers.  So how does that all work again?!

Enforcement of the law: the missing elephant in the room

The giant Achilles heel of rampant illegal retailing of cheap, duty-not-paid cigarettes in Australia is its sheer blatancy. Every shop selling them and every on-line ad for courier delivered vapes reaches out to its customers with often unmistakable signage and none too cryptic on-line language (eg: fruit, many varieties). “Here we are, come on in, or txt us a meeting point where we’ll deliver the vapes”. It could hardly be more in-your-face.  I recently counted 22 cheap smokes shops in just two adjacent Sydney suburbs.

If ordinary citizens can locate these outlets with absolute ease, it is obvious that so can those charged with investigating and enforcing the laws. So why are the shops proliferating and prosecutions occurring at dismal rates?  Many of the public are asking this question. Health Minister Mark Butler this week encouragingly announced $156.7m extra for police enforcement.

Those selling illegal recreational drugs do not open shops with signs like “Cheap meth, heroin, ecstasy here”. The government has for many decades “banned” all retailers other than pharmacies from selling prescribed drugs, but criminal gangs have not set up high street shops all over the country with signs “Get your medicines here – no prescription needed!” Neither do we see every second corner shop without a liquor licence selling alcohol.  In both cases, the law would come down very fast and hard.

Australian governments now have national and state laws with numbingly high maximum penalties for selling illegal vapes and duty-not-paid smuggled tobacco.  These penalties are set at levels designed to seriously deter both major a small-level commercial involvement in these illegal sales. 

The fuel industry’s Mark McKenzie,  the convenience stores’ Theo Foukkare and Big Tobacco all have got one thing very right: governments need to act quickly on illegal trade. Illegal and legal cigarettes are both deadly (up to two in three long term smokers die from tobacco caused disease). Legal tobacco retailers, like petrol-driven car manufacturers, DVD hire shops and typewriter manufacturers know they are well into the endgame of having large customer numbers who still want to buy their products.

As with illicit drugs, no government has succeeded in eliminating all contraband tobacco. But some, like the UK, appear to have made major in-roads into the illegal tobacco problem.

Australia’s pharmacy vape access policy together with governments acting against illegal retailers and importers, could feed a global appetite for a template that will make smoking history. So what is Australia waiting for?

Addendum

The Government today announced a huge round of law enforcement reforms to the issues raised above. Plus press conference transcript