Coalition's Tobacco Excise Cut Is Costed as a $7.9 Billion Saving Because the PBO Assumes Smokers Switch Back to Legal Cigarettes

Aditi Sarkar

29 October 2026 09:03 PM AEDT

Coalition's Tobacco Excise Cut Is Costed as a $7.9 Billion Saving Because the PBO Assumes Smokers Switch Back to Legal Cigarettes

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Highlights

The PBO estimates the Coalition's tobacco excise cut and vaping legalisation would save $7.9 billion over four years, about a quarter of the total $31.3 billion savings package.
The saving partly assumes smokers switch back from black-market cigarettes to the legal taxed market.
A smaller-than-expected switch would reduce the projected saving, since excise is collected only on legal tobacco.
The full savings package is earmarked to fund the Coalition's $9.7 billion income tax plan, but migration, defence and Labor tax reversal costs are not yet included.

Cutting a tax usually costs the budget money. The Parliamentary Budget Office has reached a different conclusion about the Coalition's tobacco plan. The PBO estimates the Opposition's previously announced policy to cut tobacco excise and legalise vapes would save $7.9 billion over four years. That figure depends partly on an assumption that smokers switch back from the black market to legal cigarettes - a projection that could shrink if behaviour does not follow.

A Tax Cut Costed as a Saving

The tobacco figure is one item in a broader set of Coalition costings worth $31.3 billion over four years. The other items are $9.4 billion from climate programs, $7.3 billion from industry subsidies, $4.7 billion from housing programs and $2 billion from removing welfare and NDIS eligibility for non-citizens. Together they are meant to cover the $9.7 billion cost of indexing tax brackets and scrapping Labor's $250 Working Australians Tax Offset. All of this is an Opposition proposal and would require legislation after an election win.

Why the Switching Assumption Matters

The logic behind the estimate is straightforward. Excise is collected only on legal tobacco. Cigarettes sold on the illicit market pay no excise at all. If a lower excise rate makes legal cigarettes cheap enough to win smokers back from illicit sellers, revenue on each legal pack falls but the number of packs paying tax rises. Whether total revenue goes up or down depends on how many smokers switch. The ABC said the PBO's saving is partly the result of assuming that switch. Legalising vapes could also bring a restricted product into a regulated, taxable market.

What the Costings Leave Out

The ABC described the update as incomplete. It excludes the Coalition's migration cuts and its pledge to scrap Labor's tax cuts, and is unlikely to cover reversing Labor's changes to capital gains tax, negative gearing, trusts and super balances above $3 million, or higher defence spending. Some of those changes are already law. The Tax Reform No. 1 Act 2026, which received assent on 26 June 2026, replaces the 50% CGT discount and limits negative gearing to new builds for properties bought after 12 May 2026. Division 296 on super balances above $3 million has applied since 1 July 2026.

FAQs

Q: How can cutting a tax produce a budget saving?

A: Excise is collected only on legal tobacco sold in Australia. If a lower rate encourages enough smokers to buy legal cigarettes rather than illicit ones, the number of packs paying tax increases. Provided that volume increase is large enough, total excise revenue can rise even with a lower per-pack rate.

Q: What is the break-even point for the tobacco measure?

A: The break-even depends on assumptions the ABC report does not spell out, including how quickly smokers respond and how much of the illicit trade can be won back. The PBO's $7.9 billion estimate reflects those assumptions and should be read as a projection under specific behavioural conditions.

Q: Is total excise revenue growing or shrinking over the long term?

A: The PBO's 2026-27 medium-term budget outlook projects total excise falling from 1.3% to 1.1% of GDP over the decade, mainly fuel excise as electric vehicles take a larger share of the fleet. Tobacco excise is a smaller but still significant part of the total.

Q: When will the Coalition publish full costings covering migration, defence and Labor tax reversals?

A: The ABC noted opposition costings are usually finalised close to an election, and this early release is unusual. Further costings on migration, defence and the reversal of Labor's enacted tax changes are still to come.

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