Excise taxes are a specific tax the government uses to target specific products, particularly those that are considered harmful to society, like alcohol, tobacco and gambling. These duties differ from general consumption taxes, as they raise the prices of specific products to make them too expensive, curbing their use. Excise taxes have also contributed significantly to government coffers, making them a major revenue source for governments across the country. This gives excise duties the dual benefit of lowering harm while generating extra revenue. However, these taxes have seen rapid hikes over the past few years, making products more expensive. This expense has spurred demand for illicit trade, which costs consumers less as it avoids duties. Illegal products counteract the intended impact of excise charges, siphoning revenue and driving unwanted demand for products like alcohol, tobacco and gambling.
Illicit trade
Alcohol, tobacco and gambling each has its own unique taxation mechanism. This varies in the illicit market. Excise taxes on alcoholic beverages like beer and spirits are charged based on volume and alcohol content. The higher the alcohol content of these drinks, the higher the tax rate. As of February 2026, Australia’s tax on spirits is $107.99 per litre of pure alcohol, the highest in the world outside of Scandinavia. Meanwhile, wine is subject to the Wine Equalisation Tax, which applies a 29% tax to the wholesale value of wine rather than an excise duty. In the case of alcohol, taxes are primarily avoided through unlicensed production and under- or not-declaring imports. According to Drinks Trade, denatured alcohol, which is often produced illegally, retailed at $10 per litre in 2024, which made it a fraction of the cost of legal beverages like spirits. According to the latest estimates from the Australian Taxation Office, the annual cost of this illicit activity was reported to be $767 million in 2023-24, around 10.0% of legally consumed spirits by volume.
Tobacco production is banned in Australia. The Federal Government announced an industry buyout in 2006 and transactions were completed by 2009, according to Cancer Council’s Tobacco in Australia report. This buyout has seen products like cigarettes exclusively imported into Australia, mainly from Asian countries like Indonesia and Taiwan. To stamp out tobacco use, the government has been levying excise duties based on weight. For example, between March and August 2026, tobacco in stick form that doesn’t exceed 0.8 grams will be charged at $1.53 per stick. If the tobacco isn’t in stick form or exceeds the 0.8 grams per stick actual tobacco content, it’s charged at $2,445.26 per kilogram. These rates have jumped drastically over the past few years, as indexation was combined with three annual 5% increases between September 2023 and September 2025. According to Cancer Council’s Tobacco in Australia report, excise rates in 2025 were 2.8 times higher than in 2012. To avoid these charges, smugglers are importing and producing cigarettes. In August 2024, the Australian Border Force intercepted a shipment of 12 million illicit cigarettes in New South Wales and, in January 2026, lead a raid that uncovered an illegal cigarette manufacturing operation in north-west Sydney. Both operations seized millions of dollars’ worth of goods. The 2024-25 Illicit Tobacco and E-cigarette Commissioner Report notes that established smuggling routes are being used to bring tobacco products into the country, increasing availability. The Australian Criminal Intelligence Commission and the Australian Institute of Criminology report that costs from illicit tobacco use, including lost tax revenue, healthcare and lower productivity, were around $4 billion in 2023-24, quadruple the amount in 2020-21.
Gambling taxation varies by state and territory, with no national oversight. Each gambling type, like pokies, wagering and lotteries, is taxed separately with different rates. These taxes are based on gambling revenue, with allotted amounts charged upon transaction. To get around gambling taxes, consumers use offshore or unlicensed online betting platforms, which can circumvent regulations.
As excise taxes climb, legally sourced products become more expensive. This happens as businesses pay the tax and pass down the cost to consumers. As the price gap between legal and illegal products widens, more users are incentivised to engage the illicit market to access less expensive alternatives, especially during a cost-of-living crisis. Illicit trade also detracts performance from alcohol, tobacco and gambling industry operators, lowering revenue and negatively impacting profit margins by shrinking their customer base. As noted in multiple publications, from the ABS, Cancer Council’s Tobacco in Australia report and the National Institutes of Health’s qualitative research, heavy users and those from lower-income or disadvantaged backgrounds are the most susceptible to engaging in illicit trade, as these groups are the most active consumers and participants in alcohol, tobacco and gambling and require less costly alternatives, given their frequency of indulgence. This means that users who can least afford to inherit health, financial and legal risks are exposed to them the most.
Balancing revenue, health and the black market
Governments face the tricky task of managing fiscal stability, public health and market integrity when enforcing excise taxes. A balance has to be found where higher duties can generate tax revenue and reduce harmful consumption, without driving illicit trade. Policy makers can look at tax revenue data and consumption rates, while monitoring the enforcement and border-control seizures of illegal products, to evaluate the sweet-spot for excise duties. For example, according to data from Tobacco Australia, tobacco excise revenue rose 77.7% between 2014-15 and 2019-20, driven by sharp hikes in excise duties, which climbed from $587.62 to $1,309.85 per kilogram of loose tobacco, cigarettes or cigars weighing greater than 0.8 grams over the period. However, collections have fallen rapidly since duties crossed the $1,500 mark, with a 36.1% drop in tobacco excise revenue between 2022-23 and 2024-25. This period included an additional 5% tax applied on tobacco products by the government between September 2023 and September 2025, on top of indexation, and has coincided with growing estimates of illicit tobacco consumption and a less-pronounced contraction in smoking rates over the same period, suggesting that a portion of demand has now shifted to illegal, untaxed channels.
Investing in law enforcement, establishing a taskforce to track down smugglers and working with businesses, like tobacco wholesalers and retailers who operate in these industries, to prevent goods leaking into the black market can help combat rising illicit trade. Recent steps include the 2025-26 Federal Budget adding $156.7 million in program funding to an outstanding commitment of $188.5 million over a four-year period, announced in the 2023-24 budget, for the Australian Border Force to develop new compliance models to tackle illicit tobacco.
Alcohol and gambling also receive investment to reduce consumption but these funds are mainly seen in state budgets and focus on minimising harm with regulations around venue licensing, illegal gambling, awareness campaigns and support for healthcare institutions for treatment rather than explicitly targeting illicit activity. This is due, in part, to the complex taxation structure of alcohol products, which is based on alcohol content, and state and territory governments relying on revenue from gambling activity. For example, alcohol is less prone to illicit trade, compared to tobacco, as consumers can substitute heavily taxed, high alcohol content beverages for low or non-alcoholic drinks, which are taxed at lower rates.
Moving forwards
As governments look to reduce consumption and illegal activity around alcohol, gambling and tobacco, more regulations, tax reform and enforcement will be seen over the coming years, like the 2024 introduction of the Public Health (Tobacco and Other Products) Act 2023, which further restricted tobacco control laws around advertising and packaging. This will occur as pressure mounts from parliamentary inquiries and royal commissions, like the investigations into casino operator Crown’s activities across multiple states and calls from health bodies, like Diabetes Australia, to tackle alcohol consumption.
Across the economy, many industries can help tackle illicit trade.
- Tobacco, alcohol and gambling businesses: can implement strong supply chain control, like product tracking and customer checks, to limit leakage in the black market. They can adjust pricing and the product mix to better align with tax rates and evolving consumer behaviour, like stocking low or non-alcoholic beverages.
- Financial institutions: can improve their detection and reporting of suspicious transactions that may be linked to illicit trade. They can work with regulators to develop payment blocking or de-risking strategies to limit consumer harm.
- Accounting and advisory firms: can support clients in high-risk sectors, like tobacco, alcohol and gambling operators, in understanding and complying with excise and licensing obligations. They can conduct assurance and risk assessments of vulnerabilities in operations.
- Educational institutions: may integrate content on excise taxes, illicit trade and relevant regulations into courses like economics, public policy and health. Working with governments and the industry to research products and consumption trends can improve their understanding and response to countering illicit trade.
- Health and community organisations: can identify hotspots via the use of data, like consumption, to identify vulnerable communities or areas that can be prone to illicit trade. They can help stage interventions and advocate for treatment in the impacted regions.
The Nordic nations provide an example for Australia to follow in reducing consumption and, consequently, the demand for illicit goods. Countries like Finland, Iceland, Norway, Sweden and the Faroe Islands use alcohol monopolies. These give shops the exclusive right to sell alcoholic beverages in these nations, with a focus on restricting alcohol availability and commercial influence through preventing the sale of strong beverages by supermarkets and private retailers. Limits are also placed on outlet numbers, operating hours and days, enforcing age limits and banning discounts. For example, the state-owned Alko in Finland, aims to reduce consumption and harm, unlike for-profit stores. Australia can use this model as inspiration to develop its own model, one that can encompass the alcohol, tobacco and gambling industries.
Final Word
Excise taxes placed on harmful activities, like tobacco, alcohol and gambling, to control consumption, are a strong tool at governments’ disposal. But overdoing this measure or relying on it alone to stamp out consumption isn’t enough, especially given the recent trend of steep rate leading to falling collections. Strengthening enforcement helps, but industries can make a greater impact by limiting incentives to access illicit products. They can do this through preventive measures that raise awareness of the issues. As the challenge of tackling consumption and illicit trade continues, organisations like the government, industry firms and health bodies will need to continue adapting their approach.
