Mr Butler slammed Angus Taylor's plan to cut the tobacco excise by 80 per cent, accusing the opposition leader of "pathetically" following One Nation, which also plans to slash the excise by 75 per cent.
"We're not interested in joining the coalition in a price discounting war with organised crime," Mr Butler told parliament during Question Time on Tuesday.
However, many state leaders say it's time to do something, with recent crimes including fire-bombings and extortion believed to be part of a battle for control of the illicit cigarette market.
NSW Premier Chris Minns told Sky News on Tuesday the current tax settings were making it harder for police to shut down organised crime gangs.
"If the demand is there as a result of the tax settings it's very difficult to do it permanently," he said.
Recent killings in Sydney's west believed to be cases of mistaken identity have increased pressure on the NSW government to act on organised crime.
Mr Minns said the availability of illicit cigarettes, which range from around $15 for a packet of 20 compared to upwards of $40 for the legal versions, was having the opposite effect in terms of deterring people from smoking.
"I think it's perversely driving a situation where you're seeing more people not less people smoking because they've got access to readily available cheap cigarettes.
"It's not working. It's the opposite of the intended policy."
A spokesperson for the Victorian government said while criminals shouldn't be able to dictate public health policy, something needed to be done.
Since March 2023, there have been more than 150 tobacco store fires in Victoria, including a firebombing in Melbourne on Thursday which left the alleged offender fighting for his life.
"We continue to urge the Commonwealth to look at the rise of illicit tobacco and the link to the excise, and act on it," they said.
Tasmanian Premier Jeremy Rockliff said excessive tax increases had fuelled the illegal tobacco market when family budgets were already stretched.
"This has led to an increase in the illicit and more dangerous tobacco market," he said.
"Now it's time for Canberra to act."
But Mr Butler said reductions to the excise to tackle organised crime assumed those selling illicit cigarettes wouldn't also lower their prices.
"We're not going to join in a policy that the leader of the opposition admits assumes that organised crime isn't going to change their price one cent," Mr Butler said.
"They're not that smart, are they? They're just going to leave their price completely as is?"
