Australia’s Tobacco Prohibition: When Paternalism Creates a Black Market
Australia has spent decades conducting an extraordinary social experiment with tobacco. Cigarettes remain legal, but governments have progressively taxed, regulated and socially marginalised smoking to the point where the legal product has become extraordinarily expensive. The justification has always been public health. Make smoking sufficiently unpleasant and expensive, the theory goes, and people will stop.
There is only one problem. People do not necessarily behave as governments would like them to behave. Surprise, surprise!
One Nation has now proposed cutting tobacco excise by 75 per cent, which it says would reduce the price of a legal packet currently costing about $46.50 to roughly $21 or $22. The objective is not primarily to encourage smoking but to make legally sold cigarettes competitive with illicit cigarettes, which can sell for somewhere between about $10 and $25 a packet.
The proposal has predictably horrified sections of the public-health establishment. Yet Australia has reached the point where simply repeating that high tobacco taxes discourage smoking is no longer sufficient. The policy has produced consequences of its own, and those consequences increasingly resemble one of history's most famous experiments in paternalistic prohibition.
The United States prohibited the manufacture and sale of alcoholic beverages nationally from 1920 until 1933. Americans did not suddenly lose their taste for alcohol because politicians had decided drinking was bad for them. Demand remained, legitimate supply disappeared, and criminals stepped forward to satisfy the market. Prohibition did not invent organised crime, but it gave criminal organisations an extraordinarily lucrative commodity around which to build their operations.
Australia has not technically prohibited cigarettes. It has done something economically similar by making the legal product so expensive that an enormous price differential has opened between legal and illegal tobacco. Once that happens, organised crime does not need an invitation.
The consequences are no longer theoretical. Australia's illicit tobacco trade has been accompanied by firebombings, shootings, extortion and killings as criminal organisations fight for territory and profits. One Nation points to 193 arson attacks and six deaths associated with the illicit tobacco conflict. Whatever one thinks about smoking, this is hardly an advertisement for successful public policy.
Official figures make the problem even harder to dismiss. The Parliamentary Budget Office reported in July that illicit tobacco consumption was estimated at around 80 per cent of total consumption in 2025. Tobacco excise revenue projections have consequently collapsed. The estimate for 2026–27 has fallen from $14.7 billion in the 2023–24 Budget forecasts to just $3.6 billion in the 2026–27 Budget.
Other official estimates are lower, illustrating the considerable uncertainty involved in measuring a black market. The Australian Institute of Health and Welfare reports that the Illicit Tobacco and E-cigarette Commissioner estimated the illicit market at 50–60 per cent in 2024–25, while an earlier Australian Taxation Office estimate put the illicit share at about 25 per cent in 2023–24. Nobody can measure illegal transactions with perfect precision. What is beyond serious dispute is the direction of travel: the illegal market has become enormous.
That should surprise nobody familiar with elementary economics. If governments make a product costing $40 or $50 legally available alongside essentially the same product costing perhaps $15 or $20 illegally, they create an enormous financial incentive for both buyers and sellers to evade the law. The greater the difference becomes, the greater the potential profit for criminal suppliers.
The government response is essentially that enforcement should solve the problem. Canberra has committed more than $365 million since early 2024 to combating illegal tobacco, including stronger border and state enforcement. Health Minister Mark Butler argues that government should not surrender health policy to organised crime merely because criminals have exploited the existing tax regime.
There is something to that argument. Governments obviously cannot abandon every law that criminals violate. Nor should the health consequences of smoking be minimised. Smoking remains one of Australia's largest preventable causes of death, and reducing smoking rates is a legitimate public-health objective.
But this misses the deeper point. When a law or tax creates such powerful incentives for evasion that an enormous illegal industry emerges, enforcement eventually becomes a game of squeezing a balloon. Close one illegal tobacco shop and another opens. Seize one shipment and another route becomes profitable. Arrest one distributor and the extraordinary profit margin attracts somebody willing to replace him. That was one of the lessons of American Prohibition. Government cannot repeal the laws of supply and demand.
There is another uncomfortable aspect to the Australian debate. Tobacco taxation is routinely defended on the grounds that smoking imposes costs upon the health system, yet tobacco excise is not a dedicated levy placed into a quarantined fund exclusively for treating smoking-related illnesses. It enters Commonwealth revenue. Politicians then decide how public money generally will be spent.
This creates an obvious tension. Governments simultaneously declare that they want tobacco consumption to disappear while incorporating tobacco excise into their revenue system. If every Australian smoker quit tomorrow, the public-health bureaucracy could celebrate an extraordinary success, but Treasury would have to deal with the disappearance of billions of dollars in revenue. The two objectives are not identical.
More fundamentally, the tobacco debate raises an old philosophical question about paternalism and liberty. John Stuart Mill's famous harm principle held, broadly speaking, that coercion against an adult is justified to prevent harm to others, not merely to protect that adult from himself. Modern Australia has travelled a considerable distance from that classical liberal conception. Increasingly, government does not merely prohibit conduct that harms others. It regulates what adults eat, drink, smoke, gamble, drive and consume on the theory that government knows what is best for them.
There are good arguments for some of these interventions. Cigarette smoke can affect other people. Addiction complicates simplistic notions of completely free choice. Governments running taxpayer-funded health systems inevitably have an interest in behaviour that increases medical expenditure.
But paternalism has limits, and one of those limits is practical rather than philosophical. Eventually citizens refuse to cooperate. Australia may now have reached that point with tobacco. Governments pushed the price lever harder and harder because previous increases appeared to work. Eventually they pushed it beyond the point at which many smokers were willing to pay the legal price. The smoker did not disappear. He simply became a customer of the black market.
Worse still, the illegal market removes many of the controls supposedly justified by public health. Criminal tobacco dealers do not collect excise. They do not care about government packaging regulations. They have little incentive to worry about the provenance or contents of their products. And criminals are unlikely to display much concern about selling nicotine products to young people.
The paternalistic state can therefore produce the opposite of what it intended. In trying to control consumption ever more tightly, it drives consumption beyond its own regulatory reach.
One Nation's proposal should therefore be considered seriously rather than dismissed as being "pro-smoking." There is an obvious difference between believing smoking is unhealthy and believing that the existing taxation policy is sensible. A government could continue discouraging smoking through education, restrictions on sales to minors, advertising controls and assistance for people who want to quit while recognising that the present excise has reached the point of diminishing, or even negative returns.
Cutting the tax would not magically destroy organised crime. Illegal sellers might reduce their prices further, and some smokers might consume more if legal cigarettes became cheaper. These are genuine objections. But they need to be weighed against what is actually happening rather than against an imaginary world in which ever-higher taxation simply makes smoking vanish.
The choice is not between expensive cigarettes and a cigarette-free Australia. Increasingly, it is between expensive legal cigarettes and cheap illegal cigarettes sold through criminal networks.
That is where the analogy with Prohibition finally bites. Governments can regulate human behaviour, influence it and sometimes successfully discourage it. What they cannot reliably do is price a product desired by large numbers of adults almost out of the legal market and assume that the demand will obediently disappear.
Australia's tobacco experiment is consequently about something larger than cigarettes. It illustrates the recurring weakness of the paternalistic state: politicians see an undesirable behaviour and assume that sufficient taxation, regulation and coercion must eventually eliminate it. But citizens have preferences of their own, markets adapt, and criminals flourish wherever government creates sufficiently profitable opportunities.
Liberty sometimes permits people to make foolish choices. Paternalism promises to prevent those choices. The danger begins when the attempt to save people from themselves produces consequences worse than the behaviour government originally set out to suppress.
America discovered that lesson with alcohol a century ago. Australia may now be discovering it again, one illegal packet of cigarettes and one firebombed tobacco shop at a time.
https://www.theepochtimes.com/world/one-nation-vows-to-shave-about-20-off-cigarette-packs-in-anti-black-market-bid-6076341
