Mental illness sufferers are four times more likely to smoke than the general population - a smoking rate that has stayed relatively stagnant for the past 20 years.
This costs taxpayers more than $30 billion a year, according to the latest estimate from Access Economics.
University of Melbourne researcher Kristen Moeller-Saxone surveyed 280 clients of a psychiatric support service in Melbourne's northern suburbs.
Of the patients surveyed, most of whom had schizophrenia, more than six in 10 smoked, compared with fewer than two in 10 members of the general public.
Smokers with a mental illness averaged 22 cigarettes a day, which is 50 per cent more than smokers without a mental illness.
Almost three quarters of survey respondents said they wanted to quit smoking but only 12 per cent had successfully given up smoking.
Tackling smoking for people with a mental illness must be part of the mental health strategies from the federal and state and territory governments, Moeller-Saxone said.
She is disappointed with the Victorian Government's five-year tobacco strategy, released in August, which left out smokers with a mental illness.
There was a smoking culture in psychiatric facilities across Australia amongst staff and patients.
"There is still a strong smoking culture in psychiatric wards," she told reporters.
There was also an unproven theory that nicotine alleviates some of the faulty neurotransmitter activity in schizophrenics, thus easing their symptoms.
"The problem with that is that it is a dirty-needle syndrome. Nicotine might be helping but there is 4,000 chemicals in cigarettes and most of those kill you," Moeller-Saxone said.
"It is a wild cocktail of chemicals."
Most smokers use cigarettes to help them cope with stress.
"People with mental illness are more susceptible to negative feelings and need some sort of coping strategy to deal with it.
Those people who take anti-psychotic medication also have a greater risk of contracting diabetes, and suffering complications such as amputation.
The drugs Zyban and Champix that are used to help people quit are on the taxpayer-funded Pharmaceutical Benefits Scheme but they cause complications for mental illness sufferers, Moeller-Saxone said.
She called for nicotine replacement therapies to be listed on the PBS for people with mental illnesses.
Moeller-Saxone's research is published in this month's edition of the Australian New Zealand Journal of Public Health.
