The revenue hole nobody can explain away
New Zealand’s tobacco excise revenue is running $164 million below forecast so far in 2025, with the annual shortfall on track to hit $225 million if current trends hold. Treasury’s baseline forecast pegged tobacco excise at $1,453 million for 2025. Actual collections are coming in well below that.
The government’s 2024 decision to halve excise on heated tobacco products is sometimes floated as an explanation, but the NZ Initiative calculates that change reduced revenue by only about $3 million. Statistics New Zealand recorded just 3,652 kilograms of heated tobacco imports for 2025, less than a tenth of what the Ministry expected. That leaves a $220-million-plus gap, and the most plausible explanation is that a growing share of consumption is happening outside the legal, taxed market entirely.
A price gap that prints money for criminals
The economics are brutally simple. Tobacco excise has risen from $393.03 per kilo in 2009 to $1,812.61 today, with tax now comprising roughly 80% of a legal pack’s retail cost. A legal 20-pack costs $40 to $50. Illegal cigarettes sell for $20 to $25. One Auckland outlet flagged in Retail NZ’s report was selling packs for $13 each, less than a third of the legal price. Another Auckland vendor was delivering cartons of ten packs for $150.
Industry-funded research from FTI Consulting puts the illicit share at 27.2% of all tobacco consumed in 2024. Customs estimates 10 to 20%. Public health academics put it between 5 and 7%. Nobody agrees on the number, but the direction is unanimous: seizures are up, revenue is down, and the problem is accelerating.
Honest shop owners are paying the price
This is where the story shifts from fiscal abstraction to competitive damage. Retail NZ’s report describes one Auckland store as “a regional destination for illicit tobacco, drawing purchasers from outside the community and jeopardising the viability of legitimate small businesses”. That outlet was not checking ID, undermining the age-verification rules that compliant retailers follow at their own cost.
When a complainant reported the store to health officials, police, and Customs, the response was a case study in dysfunction. Health officials could remove illegal signage but lacked power to seize product. Customs could not act because the product had already passed the border. Police did not respond due to “competing pressures.”
Dave Hooker, Executive Director of the NZ Association of Convenience Stores, has been warning about this for years: “There is acceptance that a decade of increasing excise tax has been a primary driver of the illegal tobacco market.”
Enforcement is catching less than a tenth of what gets through
Customs seized 11.1 million illegal cigarettes and 5.4 tonnes of loose tobacco in 2025, representing about $16 million in evaded tax. If the annual shortfall is $225 million, seizures are intercepting less than 10% of what is entering the country.
Smuggling now carries a maximum penalty of five years, compared to life imprisonment for Class A drugs. Selling illicit cigarettes at the retail end attracts a $20,000 fine or six months in prison. Criminals have done the maths. As Chief Customs Officer Nigel Barnes put it, smugglers are now [“mirror[ing] what we see drug smugglers do, similar concealment methods and similar tradecraft”](https://www.nzherald.co.nz/nz/nz-customs-battles-growing-illicit-tobacco-smuggling-trend-the-front-page/VF323NPIFFH6BHUN33Y4KTXCDY/).
Australia shows where this ends
Australia pushed tobacco taxes even higher than New Zealand’s without building enforcement to match. The result: an illicit market comprising nearly 40% of consumption and approximately 200 firebombings in Victoria alone in the past year. Steve Symon, who headed a ministerial advisory group on organised crime, warned that “what’s happening there, will happen in New Zealand in 12 to 18 months, because our conditions are really similar”.
Retail NZ wants a taskforce, the government is still thinking
Retail NZ chief executive Carolyn Young has called for an immediate multi-agency Illicit Tobacco Task Force, mandatory licensing of all tobacco wholesalers and retailers, ring-fenced excise funding for enforcement, and higher penalties. Associate Health Minister Casey Costello welcomed the report and said she had instructed officials to assess how agencies could work in a more coordinated fashion.
Jordan Williams of the Taxpayers’ Union framed the cost in household terms: “On a per household basis, the cost of lost revenue is up to $160 per year.”
The government has two choices. Enforce the rules that justify the tax, or admit the current rate is unenforceable and adjust accordingly. What it cannot keep doing is lifting the price signal while leaving the enforcement gap wide open. Every month of inaction makes the criminal supply chains harder to dislodge and the competitive disadvantage for compliant retailers more entrenched. The firebombings in Melbourne started the same way.
Sources
- NZ Initiative: Tobacco excise income has plunged – is the illicit trade to blame? (2025-07-09)
- Treasury OIA Response 20250377 – Heated Tobacco Products and Tobacco Excise (2025-07)
- NZ Herald: Study claims illicit tobacco is now more than a quarter of the New Zealand market (2025-08)
- RNZ: Fears NZ’s tobacco black market will get as bad as Australia’s (2025-06)
- NZ Herald: Calls for Govt tobacco taskforce to combat growing black market (2025-07)
- NZ Herald: NZ Customs battles growing illicit tobacco smuggling trend (2025-06)
- RNZ: Retail NZ wants ‘rigourous crackdown’ by government on illicit tobacco (2025-07)
- FMCG Business: Black market and the ‘Smokefree Generation’ (2025)
- Taxpayers’ Union: Taxed to the ashes – Tobacco tax driving illicit market (2025)