The overall prevalence of smoking in New Zealand reduced from 32% in 1981 to 23.5% in 2006 but rates of smoking cessation have not been consistent among all social, demographic and ethnic groups. The period 1981-2006 also saw macroeconomic changes in New Zealand that resulted in profound increases in social and economic inequalities. Within this socio-political context we address two questions. First, has there been a social polarisation in smoking prevalence and cessation in New Zealand between 1981 and 2006? Second, to what extent can ethnic variation in rates of quitting be explained by community inequality, independently of socio-economic status? We find that smoking behaviour in New Zealand has become socially and ethnically more polarised over the past two decades, with greater levels of smoking cessation among higher socio-economic groups, and among New Zealanders of European origin. Variations in quit rates between Māori and European New Zealanders cannot be fully accounted for by ethnic differences in socio-economic status. Community inequality exerted a significant influence on Māori (but not European) smoking quit rates. The association with community inequality was particularly profound among women, and for particular age groups living in urban areas. These findings extend the international evidence for a relationship between social inequality and health, and in particular smoking behaviour. The research also confirms the importance of considering the role of contextual factors when attempting to elucidate the mechanisms linking socio-economic factors to health outcomes. Our findings emphasise that, if future smoking cessation strategies are to be successful, attention has to shift from policies that focus solely on engineering individual behavioural change, to an inclusion of the role of environmental stressors such as community inequality.