In 1993, my house state of Michigan enacted the Tobacco Merchandise Tax Act, which raised taxes on cigarette packs from 25 to 75 cents per pack. These have been the very best excise taxes within the nation at the moment. Michigan legislation nonetheless carries stiff penalties for tax violations, and anybody holding a pack with out a Michigan stamp is accountable for the tax, plus a penalty of 5 occasions that quantity.
The people who smoke I knew again then began making late-night runs south of the border, to Indiana, the place cartons have been taxed at half the speed of the Nice Lakes State. In a single, four-hour surveillance motion, Michigan State Troopers recorded greater than 180 Michigan-plated autos at simply 4 Indiana celebration shops alongside Interstate 69. Indiana’s low-tax regime attracted the shoppers in droves. Michiganders started voting with their toes, and the Hoosier State welcomed them with open arms.
An identical story is unfolding within the Land Down Below. The Aussies face a nationwide tax meant to cut back the well being considerations of smoking, and packs are actually averaging between A$40–$50 ($25-34 US). Every particular person cigarette is taxed A$1.52, and the value of the behavior has people who smoke choking.
Predictable second-order outcomes are rising. Underground markets provide packs for round A$13: the value distinction presents large revenue alternatives for smugglers. Markets expanded shortly, and when extra opponents tried to enter, sellers turned on one another. Over 200 arson assaults have been instigated amongst competing teams as of February 2026, with nearly all of the fires set in tobacco outlets in Melbourne. Demand hasn’t disappeared (about 8 p.c of Australian adults smoke, corresponding to US charges) so when costs tripled over 10 years, people who smoke merely sought out unlawful sellers.
Australia’s tobacco-related firebombing is a case research in prohibition insurance policies. When governments tax a authorized product extremely sufficient, shoppers search out low-price alternate options. The tax coverage was meant to finish smoking, however has as a substitute produced decrease tax revenues. Charges of use haven’t declined.
The Australian Bureau of Statistics greater than 80 p.c of tobacco Aussies devour is now black market. Their Border Power confiscated about 2.53 billion illicit cigarettes in FY 2025, as in comparison with 598 million in FY 2021, a outstanding 320 p.c improve. The Australian states obtained A$23.4 million to police the commerce.
The tobacco excise tax raised A$16 billion in 2020, however took in simply A$3.93 billion for FY 2026. These revenues have fallen as tax charges have risen. Current studies anticipate tobacco tax income to say no by A$8 billion over 5 years.
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Theo Foukkare of the Australian Affiliation of Comfort Shops, an business group for the retailers shedding authorized cigarette gross sales, warns that with out a repeal of the coverage, there can be far much less excise tax for the federal government to gather. Illicit sellers actually gained’t be submitting tax returns both.
Mark Thornton’s 1991 The Economics of Prohibition anticipates these outcomes with outstanding element. He portrays prohibition as a tax the place enforcement creates threat for suppliers, and that threat raises costs, whereas reducing output. Thornton’s argument is that excise taxes and outright bans create related incentive constructions. Taxes can be utilized as oblique prohibition and Thornton described the implications of this method. He pointed to a number of economists:
Johnson (1978) gives extra proof that…unit taxes lead to larger costs than predicted by the normal mannequin of taxation. Harris (1980) additionally acknowledges that growing the per-unit taxes on cigarettes results in a substitution of high-potency cigarettes for low-potency cigarettes.
Australian public well being officers laud the brand new coverage and report falling smoking charges as an necessary success. What the well being document doesn’t tackle is how the tax persuaded people who smoke to hunt out cheaper alternate options from unscrupulous actors. A criminal offense wave has been set off: smuggling and cash laundering are rampant, and rival sellers have firebombed over 220 places in makes an attempt to eradicate their competitors.
Earlier makes an attempt to cut back smoking Down Below have included plain packaging, graphic well being warnings, ingredient guidelines, age verification, and retail licensing, all of which have been utilized to packaging. 4 of 5 cigarettes smoked by Australians don’t have any of those options. Comparable insurance policies have been adopted to dissuade cigarette substitutes. Vapes have been restricted to these buying medical prescriptions, and roughly 97 p.c of e-cigarettes bought within the nation have been bought by way of unlawful sources. That market alone is estimated to succeed in A$1.6 billion in complete income and the rules nonetheless persist. Officers govern a shrinking portion of the whole commerce: what capability they needed to regulate tobacco merchandise and their substitutes goes up in flames.
The futility of those efforts to eradicate Aussies’ smoking habits is on full show. Sin and excise taxes have all the time been instruments to attempt to squelch behaviors that governments deem undesirable. However good intentions can’t negate the legal guidelines of economics. Whereas they’ve carried out little to maneuver the needle on public well being, these punitive taxes have birthed or propped up harmful felony components.
Salient parallels ought to give US policymakers motive to take heed. Excessive-tax states have lengthy been exploited by smugglers to generate larger earnings, whereas treasury revenues dwindle. Neighboring states that maintain taxes low see their coffers broaden, as these wishing to remain on the appropriate aspect of the legislation drive throughout borders for marginally decrease costs. Australia, identical to Michigan, couldn’t cease folks from smoking, however in each instances, tax revenues collapsed. The ache is even worse within the Aussies’ case, as violent underground actors have responded to the incentives created by governing authorities.
