The premises at 403C Lake Albert Rd in Kooringal has been closed due to the alleged sale of illegal tobacco. Photo: Supplied.
The Riverina has become the epicentre of Australia’s illegal tobacco crackdown.
Authorities have recently shut down 18 tobacco stores across the region – including outlets in Wagga, Griffith, Temora and Leeton – amid allegations they were selling illegal tobacco products.
Now, one of the world’s most famous economists says Australia’s tobacco taxes may be partly to blame.
Dr Arthur Laffer, the American economist behind the famous “Laffer Curve“, has told a Federal Senate inquiry that Australia has gone past the tax “tipping point” on cigarettes.
How trying to take more can give you less
Dr Laffer argues that while tobacco taxes were originally designed to reduce smoking and raise government revenue, they have now become so high that they are driving smokers towards the black market instead.
His argument is based on a simple idea explained by the curve named after him.
If the government charged no tax on cigarettes, it would receive no revenue.
But if taxes became so high that nobody bought legal cigarettes anymore, government revenue would also collapse.
Somewhere in the middle is a sweet spot where governments collect the most revenue while still discouraging smoking.
Dr Laffer believes the Australia Government has become too greedy and has moved past that point.
The average price of a legally bought 20-pack of cigarettes has risen from around $3 in 1990 to more than $50 in 2026, mostly due to tax increases.
Meanwhile, illegal packs are sold for as little as $10 – tempting smokers away from doing the right thing.
Growth of the black market and loss of revenue
In his submission, Dr Laffer points to federal tobacco revenue falling sharply despite cigarette taxes continuing to rise.
He cites data which shows tobacco excise and customs revenue peaked at $16.3 billion in 2020 before falling to $9.7 billion in 2024 and an estimated $7.8 billion in 2025.
At the same time, illegal tobacco consumption has surged.
The Australian Taxation Office estimates about a quarter of all tobacco consumed in Australia is now illicit, with more than $3 billion in excise revenue being avoided each year.
Dr Laffer argues this is evidence that smokers are not simply quitting. Instead, many are switching from legal tobacco products to untaxed alternatives sold through illegal channels.
“When policy pushes legal prices far above illicit alternatives, it does not eliminate demand; it reallocates demand,” he wrote.
“The result is a shrinking tax base, a growing illicit economy, and a loss of control.”
A Griffith grocery store has also been closed by NSW Health. Photo: Supplied.
Call to freeze tax increases
The economist also argues tobacco taxes hit the poor harder than the rich.
“Cigarette smoking is disproportionately concentrated among lower-income individuals, implying that tobacco excise taxes function as a highly regressive form of taxation,” he wrote.
Dr Laffer points to Sweden as an example of a country that reduced tobacco taxes after concerns emerged about growing smuggling activity.
He argues Australia should consider freezing future tax increases and reducing excise rates to narrow the gap between legal and illegal products.
The Federal Government, however, has taken the opposite approach, investing hundreds of millions of dollars into border enforcement and cracking down on illegal tobacco retailers.
That crackdown has been particularly visible in the Riverina, where authorities have targeted dozens of stores amid concerns the region has become a hotspot for the illicit tobacco trade.
Debate over tobacco taxes continues
Whether Australia has truly passed the tobacco tax “tipping point” remains fiercely debated.
Public health advocates argue high prices remain one of the most effective tools for reducing smoking rates.
Research commissioned by the Cancer Council of Victoria disputes the claim that tobacco taxes incentivise smuggling and counterfeit tobacco production.
“The industry has been very successful in getting this argument into public discourse, but there is little real-world evidence to support it. This idea greatly oversimplifies the relationship between illicit trade and tobacco prices: in reality, illicit trade is primarily facilitated by weak tax administration and lack of enforcement,” it argues.
But with illegal tobacco sales flourishing in Wagga and Griffith, Dr Laffer’s warning is likely to add fuel to the debate over whether higher taxes are solving the problem – or helping create a new one.
