Ritchies IGA, which operates 156 supermarkets across Victoria, NSW, and Queensland, suggests the federal government could both repair its budget by billions of dollars and undermine criminal gangs by cutting the tobacco excise.
Tobacco sales across the chain's stores have plummeted from $300 million to $60 million in the past four years.
Oxford Economics analysis, commissioned by Ritchies, found the widening legal-illicit tobacco price gap was the main driver for substituting away from the legal tobacco market.
Over the past decade, illicit cigarette prices have increased significantly slower than legal products, at 3.8 per cent compared to 11.3 per cent annually.
This caused the estimated price gap to widen from $11 to $47.
Australian cigarettes are now among the least affordable in the world.
Excise revenue has declined sharply from a peak of $16.3 billion in 2019/20, with current Treasury estimates at $5.5 billion for 2025/26.
The forecast gap between the Commonwealth's expected tobacco excise collection in 2018/19 and the 2028/29 forecast is now $67 billion.
Based on the historical growth of the illicit market, Oxford Economics expects the excise revenue outcome for 2028/29 to be $1.5 billion.
Oxford recommends excise rates should be slashed to their 2019 level and then frozen until the legal cigarette market stabilises.
That would cut the price on a legal packet of cigarettes by a third.
The Australian Association of Convenience Stores supports the excise cut, with CEO Theo Foukkare stating enforcement is vital but cannot succeed on its own.
"The PM has a choice - a regulated market that pays tax and follows the law, or a market 100 per cent controlled by organised crime. If we don't act soon, that choice will be made for us," Mr Foukkare said.
However, tobacco control policy experts argue reducing the excise to compete with illicit sellers won't fix the problem.
"It will serve only to make illicit tobacco even cheaper and, even worse, could drive up smoking rates," University of Sydney public health school professor Becky Freeman said.
Prime Minister Anthony Albanese said the tobacco excise had resulted in historic low smoking rates.
"There is two reasons why that was put in place, it's not just about revenue - it's also about sending a message on health," Mr Albanese said told ABC Radio on Tuesday.
"And when it comes to illegal tobacco, those taxes are going into clamping down on illegal tobacco and those criminals associated with it."
NSW Premier Chris Minns urged the federal government to consider a cut in excise in 2025, but Treasurer Jim Chalmers ruled out the move.
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