13.7 Revenue from tobacco taxes in Australia

For most forms of taxation, revenue can be expected to increase over time due to increases in population and consequently the number of people from whom tax may be collected. Revenue from tobacco taxes is impacted by numerous factors:

• Smokers are moderately price sensitive (see Section 13.1): changes in price do not lead to directly equivalent changes in consumption.
• The rate of customs duty and excise has at times been eroded by inflation, and then subject to periodical increases well above inflation (see Section 13.6).
• Declining use of tobacco among the population, both in terms of smoking rates and the amount consumed among those who do smoke (see Chapter 1 and Chapter 2), due to the combined impact of increased costliness, awareness about health risks, declining social acceptability of smoking, campaigns encouraging quitting, improved treatments for tobacco dependence, and greatly reduced opportunities for smoking.
• Levels of use of illicit tobacco—tobacco on which required customs or excise duty has not been paid may also vary over time (See InDepth 13A).

This section examines current revenue from tobacco taxes and historical revenue figures related to major changes in the tobacco tax system, in the context of increased population, increased tax rates and steadily falling consumption.

In Australia, federal revenue from tobacco excise and customs duty has been collected since 1901, and state and territory governments collected revenue between 1974 and 1997 (and received tobacco revenue replacement grants from the federal Government between 1998 and 2001). Major structural changes to the revenue collected by federal and states and territory governments have occurred over time, in addition to changes to the rate of excise—see Section 13.6: What tobacco taxes apply in Australia? Further, tobacco taxes have been collected both as revenue from excise on locally manufactured products (until 2016, when local manufacturing ceased) and customs duty on imported products, and from 2001, an additional 10% goods and services tax (GST) on the sale price of tobacco. Data on excise, customs duty, and GST revenue are presented here where available.

13.7.1  Total state and territory revenue from 2001

Table 13.7.1 shows total revenue from tobacco products from 2000–01 to 2022–23, including revenue projections to 2027. Total federal revenue from excise and customs duty is presented, although over this time an increasing proportion of federal revenue has been in the form of customs duty, with all tobacco products being sold in Australia being imported since 2016—see Section 10.3.2.

Estimated total revenue from the GST on tobacco products is also set out in Table 13.7.1. From July 2001 under the new tax system tobacco replacement payments to states and territories ceased, and all federal excise duty on tobacco products was retained by the federal government. All revenue from the GST—which applies to almost all goods and services in Australia apart from fresh food—has been distributed to the states in line with the terms of the Intergovernmental Agreement. ¹ Revenue from the GST on tobacco products is not reported separately from other GST revenue. It can only can be roughly estimated based on ABS estimates of household expenditure on tobacco which are in turn estimates based on customs clearances, retail survey data and incomplete sales data provided to the ABS by large retail outlets. The proportion of revenue going to each state and territory is adjusted for various demographic and economic factors as per the Intergovernmental Agreement, ¹ spelled out in detail each year in Part IV of the Federal Financial Relations sections of Final Budget Outcome reports. ²

The data on revenue from excise and customs duty provided in Table 13.7.1 along with estimates of GST revenue from the sale of cigarettes and other tobacco products since 2000–01 represent total tax revenue from sales of tobacco products in Australia. In real terms, the total tax revenue from tobacco products increased by 38% from 2000–01 to 2022–23. Total tax revenue from tobacco products peaked in 2020. In real terms, tobacco tax revenue was about the same in 2024 as in 2016.

13.7.2  Tax as a proportion of total government revenue

It is sometimes said that governments are reluctant to tackle tobacco use in the community because of reliance on income from tobacco taxes. Table 13.7.2 shows the proportion of federal and state and territory government revenue that was made up by tobacco taxes. Data are shown for 1998–99, immediately before reforms to the tax system and introduction of the GST, ³ and in ten year increments, also including the most recent year available.

As can be seen from Table 13.7.2, tobacco tax revenue as a percentage of total government revenue declined sharply for states and territories following introduction of the reforms associated with the new tax system. Tobacco tax revenue as a percentage of total revenue increased significantly for the Australian federal government but still represented only a very small percentage of total government revenue: less than 2.3% in 2008–09 and 2.7% in 2018–19. In 2022–23, tobacco tax revenue as a percentage of total revenue was lower than in 2008–09, with tobacco excise making up approximately 2.0% of federal government revenue, and 1.9% of all federal and state/territory government revenue.

13.7.3  Per capita total tax revenue

Revenue from tobacco taxes per capita since 2001, expressed in real dollars, is plotted in Figure 13.7.1. A gradual decline in per capita tax revenue was apparent until 2010.  In real terms, tobacco tax revenue per capita increased by 21% between 2014 and 2019, after which a sharp increase was observed in 2020 . Per capita revenue was twice as high in 2020 compared to 2012 and 2013, in the years between major adjustments to tobacco excise—see Section 13.6.4. From 2020 to 2023, per capita tax revenue declined between 10% to15% annually in real terms.

13.7.4  Historical data on tobacco tax revenue in Australia

This section provides information on federal and state and territory revenue from tobacco products from the 1970s onwards, where available. As will be demonstrated in this section, this period saw significant changes to the structure of tobacco taxation, resulting in changes to both the value of revenue raised by federally and by states and territory governments, and the distribution of this revenue. Figure 13.7.2 summarises federal and state and territory revenue from tobacco products in 5-year increments from 1965 to 2005.

13.7.4.1  Federal excise revenue from tobacco products to 2005

As described in Section 13.6.4.1 Federal excise duty to 1999, the value in real terms of the federal duty payable on tobacco products remained fairly steady in the early part of the century but fell in the late 1970s and the early 1980s due to the effects of inflation. The value of the duty was restored with indexation in 1983 and once again remained steady until a series of increases in the early 1990s. This is evident in Figure 13.7.3 which shows total revenue received by the federal government from excise duty on tobacco products (cigarettes, cigars, smoking tobacco and other tobacco products) for selected years until 1980 and then for every year until 2005 in current dollars, and the same total expressed in constant 2012 dollars. During the period of 1965–2000, when state and territory tobacco licensing fees were collected, total revenue increased in current dollars in every year apart from 1993, 1998 and 1999. In real terms, revenue fell between 1980 and 1986 and fluctuated between 1987 and 2000.

This figure also highlights the dramatic increase in federal revenue arising from the introduction of new tax arrangements implemented between November 1999 and February 2001. In real terms, federal excise revenue was 1.6 times higher in 2001 than 2000, after which only minor fluctuations occurred.

13.7.4.2  Federal customs duty revenue from tobacco products, 1999-2000 to 2010-11

Revenue from customs duty increased substantially in 1999, following the 1999–2001 tax reforms and the increasing quantities of cigarettes imported from overseas, particularly following the entry into the market of Imperial Tobacco Group in September 1999, which supplied products to Australia from production facilities in New Zealand (see Section 10.3.2.3).

Table 13.7.3 shows the value of customs duty for tobacco products from 1998–99 to 2010–11. (Data are available to 2010–11.)  Revenue from customs duty for all tobacco products increased in real terms in every year other than 2003-04, almost doubling from 2009–10 to 2010–11. Over the 10 years from 2001–02 to 2010–11, the real value of customs duty revenue increased by 120%.

13.7.4.3  State and territory revenue from tobacco products to 2000

Over the late 1980s and early 1990s, licence fees on tobacco wholesalers or retailers were an increasingly important source of revenue for state and territory governments. Table 13.7.4 shows the revenue raised in each jurisdiction from these fees between 1974, when they were first introduced in Victoria, and 1997, when the fees were effectively invalidated by a High Court ruling (see Technical Appendix 13.6 for a full explanation). It also shows revenue from 1997–98 to 2000 from tobacco replacement fees. Tobacco replacement fees ended in July 2000 under the terms of an Intergovernmental Agreement on the Reform of Commonwealth–State Financial Relations. ¹ This agreement put into place the major reforms to the tax system that came into force in Australia in the year 2000, including the introduction of the GST. ³

Between 1975 and 1997 revenue from state and territorial tobacco taxes increased (without adjustment for inflation) more than one thousand-fold from just under $2.5 million in 1975 to just over $2.85 billion in 1996–97. Revenue to states and territories peaked in 1999–2000 in current dollars. Between 1988–89, by which time all jurisdictions had instituted fees, and 1999–2000 (at which time tobacco replacement payments were phased out) revenue to states and territories from this source increased by 500%, or by 350% in real terms.

References

1. Commonwealth of Australia, The States of NSW, Victoria, Queensland, Western Australia, et al. Intergovernmental agreement on the reform of Commonwealth-State financial relations. Commonwealth of Australia, 1999. Available from: http://www.treasury.qld.gov.au/office/clients/commonwealth/intergovernmental/agreement.shtml.

2. Costello P. Budget 2005-06. Final budget outcome. Canberra: Australian Government, 2006. Available from: http://www.budget.gov.au/2005-06/fbo/html/index.htm.

3. Costello P. Not a New Tax: a New Tax System. Canberra: Australian Government, 1998. Available from: https://catalogue.nla.gov.au/Record/1916627.