Rhys Hurley is investigative lead at the New Zealand Taxpayers Union
There is a point where a sin tax stops raising money and starts raising business for criminals. Tobacco duty in New Zealand and the UK is getting dangerously close to proving the point Australia has already learned.
Governments have treated smokers as an easy cash cow, increasing duties, making legal cigarettes more expensive, adding regulations or bans for people born after a certain date, and assuming this will mean fewer smokers. In the beginning, this logic might have worked. But as licit cigarettes become so expensive that the black market becomes cheaper and easier than over-the-counter options, the policy starts to prop up criminals under its own bureaucracy.
That is the Laffer curve problem now facing tobacco policy around the world. When tax rates are pushed too high, revenue does not just keep rising. Buyers change behaviour and search for affordable options, shifting demand elsewhere. This sees the government collect less than expected and, worse still, smokers do not quit; they just buy from criminals instead.
New Zealand has already seen this beginning to happen. Illicit tobacco now makes up 27 per cent of all cigarettes smoked, up from 16.5 per cent in 2022, with an estimated loss of more than $600 million, alongside an increase in smoking rates after years of decreases. That is exactly the opposite of what tobacco excise is supposed to achieve.
Australia offers the sharpest warning, with cigarette prices among the highest in the world after years of increases. Nicotine consumption has risen by almost 40 per cent since 2017, while illegal tobacco, which can be up to 83 per cent cheaper, has exploded. In 2017, illicit sources accounted for around 12 per cent of tobacco consumption; by 2025, that figure had reached 80 per cent, while tobacco excise revenue had fallen to its lowest level in 14 years. Add in a ban on vapes, and you are left with higher nicotine consumption and a multi-billion-dollar hole in the federal budget.
The UK risks heading in the same direction. Add in tight restrictions on vapes, and you are left with higher nicotine consumption and a multi-billion-dollar hole in the federal budget. If demand remains but access is restricted, supply does not disappear. The illicit tobacco market already accounts for 26 per cent of UK consumption, and age-based restrictions risk encouraging people to seek tobacco from the same sources.
The argument for these policies is weaker than advocates like to pretend. 2023 tobacco duties brought in roughly three times more than smoking costs the NHS and social care system. Smokers already more than pay for those direct costs, and if duty revenue is driven into the black market, taxpayers are left with the public health costs while smuggling networks get the cash.
Freezing or lowering tobacco excise can no longer be treated as taboo if the evidence shows higher taxes are reducing government revenue and fuelling illegal sales. Simultaneously, there needs to be a crackdown on smugglers, counterfeiters and illegal retailers, while making it easier for smokers to switch to vaping, heated tobacco and other reduced-risk products.
If people want to quit, then let them make that decision themselves rather than forcing them one way or another. Excessive regulations and taxes have only pushed more people into the black market and increased the money going into crime instead of to the Treasury.
It’s high time to cut the tax, cut the crime and cut the nanny state out of people’s lives.
Rhys Hurley is investigative lead at the New Zealand Taxpayers Union
There is a point where a sin tax stops raising money and starts raising business for criminals. Tobacco duty in New Zealand and the UK is getting dangerously close to proving the point Australia has already learned.
Governments have treated smokers as an easy cash cow, increasing duties, making legal cigarettes more expensive, adding regulations or bans for people born after a certain date, and assuming this will mean fewer smokers. In the beginning, this logic might have worked. But as licit cigarettes become so expensive that the black market becomes cheaper and easier than over-the-counter options, the policy starts to prop up criminals under its own bureaucracy.
That is the Laffer curve problem now facing tobacco policy around the world. When tax rates are pushed too high, revenue does not just keep rising. Buyers change behaviour and search for affordable options, shifting demand elsewhere. This sees the government collect less than expected and, worse still, smokers do not quit; they just buy from criminals instead.
New Zealand has already seen this beginning to happen. Illicit tobacco now makes up 27 per cent of all cigarettes smoked, up from 16.5 per cent in 2022, with an estimated loss of more than $600 million, alongside an increase in smoking rates after years of decreases. That is exactly the opposite of what tobacco excise is supposed to achieve.
Australia offers the sharpest warning, with cigarette prices among the highest in the world after years of increases. Nicotine consumption has risen by almost 40 per cent since 2017, while illegal tobacco, which can be up to 83 per cent cheaper, has exploded. In 2017, illicit sources accounted for around 12 per cent of tobacco consumption; by 2025, that figure had reached 80 per cent, while tobacco excise revenue had fallen to its lowest level in 14 years. Add in a ban on vapes, and you are left with higher nicotine consumption and a multi-billion-dollar hole in the federal budget.
The UK risks heading in the same direction. Add in tight restrictions on vapes, and you are left with higher nicotine consumption and a multi-billion-dollar hole in the federal budget. If demand remains but access is restricted, supply does not disappear. The illicit tobacco market already accounts for 26 per cent of UK consumption, and age-based restrictions risk encouraging people to seek tobacco from the same sources.
The argument for these policies is weaker than advocates like to pretend. 2023 tobacco duties brought in roughly three times more than smoking costs the NHS and social care system. Smokers already more than pay for those direct costs, and if duty revenue is driven into the black market, taxpayers are left with the public health costs while smuggling networks get the cash.
Freezing or lowering tobacco excise can no longer be treated as taboo if the evidence shows higher taxes are reducing government revenue and fuelling illegal sales. Simultaneously, there needs to be a crackdown on smugglers, counterfeiters and illegal retailers, while making it easier for smokers to switch to vaping, heated tobacco and other reduced-risk products.
If people want to quit, then let them make that decision themselves rather than forcing them one way or another. Excessive regulations and taxes have only pushed more people into the black market and increased the money going into crime instead of to the Treasury.
It’s high time to cut the tax, cut the crime and cut the nanny state out of people’s lives.