The excise, which adds about $1.50 to the price of every cigarette in a pack, is driving an underground market that has led to a spate of firebombings and arson attacks.
An estimated 80 per cent of all tobacco consumed in 2025 was illicit, up from 12 per cent in 2017, according to the Australian Bureau of Statistics.
A coalition taskforce to tackle illegal tobacco released its report on Wednesday, calling for the tobacco excise rate to be reduced by up to 80 per cent to break the business model of organised crime.
The report calls for an excise cut to go further than that proposed by One Nation earlier in August, which called for a 75 per cent reduction.
The report by senator Richard Colbeck and Monash MP Mary Aldred found criminals had taken "almost complete control of Australia's tobacco market" and an overhaul of policy settings was needed to prevent an entirely black market.
"We absolutely don't want people to smoke, but this is no longer just smoking issue," Senator Colbeck said.
"It is about who controls a billion-dollar market in our economy: the Australian government or organised crime? Right now, it should be obvious to everyone that it is organised crime calling the shots about how Australians access and consume tobacco products."
He said it was time to "dispense with the fantasy that the price of cigarettes in Australia is $50 - $60 per packet".
"When up to 80 per cent of the market is paying organised crime prices of $15- $20 per packet that is the real price of cigarettes in Australia today," the Tasmanian senator said.
The report said tobacco excise revenue has fallen from about $16 billion at its 2019-20 peak to about $8 billion in 2024-25.
This is expected to halve again to about $4 billion in 2025-26, and $2 billion by 2029-30, the report found.
It says a target of five per cent to achieve an "effective zero" smoking rate should be set, lower than the current 10 per cent aim.
One Nation has pledged to cut the tax by 75 per cent, in a bid to return to a similar rate in 2015.
The Nationals have also backed the move to lower the excise, heaping further pressure on the Albanese government which has resisted making a change.
NSW Labor Premier Chris Minns has also voiced his support for a lowered tax rate.
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