More than one in two cigarettes sold in Australia is now purchased on the black market, blowing a hole in the federal budget and undermining efforts to reduce smoking rates.

The government’s illicit tobacco tsar estimates the black market share of cigarettes climbed to 55%, but could have been as high as 60%, in the last financial year.

That means Australian taxpayers are missing out on up to AU$11.8 billion (NZ$13.5 billion) in foregone revenue each year, as consumers opt for cheap and readily-available excise-free smokes.

“Illicit tobacco and e-cigarettes represent a threat to Australia’s public health, community safety, and economy,” Illicit Tobacco and E-cigarette Commissioner Amber Shuhyta said in her inaugural annual report.

“These illegal markets undermine hard-won gains in reducing smoking rates, expose consumers to unregulated products, and fuel organised crime.”

Successive federal governments have ratcheted up the tobacco excise in an effort to lower smoking rates and increase the revenue base to ostensibly fund smoking-related health costs.

The policy found initial success, with smoking rates falling to record lows and tax revenue reaching a record high in 2019.

Since then, the excise take has been in freefall while cheaper illicit substitutes have undermined the goal of discouragement, researchers at think tank e61 Institute found.

The excise on a 20-pack of cigarettes has risen from around AU$8 in 2010 to AU$30 in 2025.

Legit pack costing more than $40

That has pushed the cost of a legal pack of smokes above AU$40 (NZ$45.87), while a black market pack can be found for less than AU$15 (NZ$17.20).

Although increasing the excise rate has caused the issue, lowering the rate to the same extent won’t result in a commensurate increase in revenue, said e61 researchers Josh Clyne and Lachlan Vass.

While it would decrease organised criminals’ profit margins, black-market sellers are entrenched and consumers have normalised the purchasing of illegal cigarettes.

Cutting tobacco excise back to 2019 levels could boost revenue by AU$3.2 billion (NZ$3.66 billion) or lower it by AU$2.1 billion (NZ$2.4 billion), depending on how smokers and sellers respond, they found.

Shuhyta argued against cutting the excise.

“Entering into a price competition with the illicit market could lead to adverse health outcomes, and undo successive generations of government policy to drive down smoking rates,” she said.

Instead she called for governments to double down on enforcement.

Enforcement agencies have received an extra AU$300 million (NZ$343.9 million) in resources over the past two years and are pulling in record hauls, with 2244 tonnes of illicit tobacco seized during 2024-25, according to her report.

Shuhyta also put the onus on people battling nicotine addiction to give up cheaper black market tobacco and choose to pay exorbitant amounts for legal options instead.

“The public also has a vital role to play by recognising that illicit tobacco is not a victimless crime. Understanding the harms of these markets, and avoiding the behaviours that fuel demand, entrench criminal activity and cause harm in our communities,” she said.